Global Evolution of Performance Auditing with Special Reference to Pakistan1 By
Muhammad Akram Khan2 Abstract
Methodology, concept and practice of performance auditing evolved during the last four decades or so in response to developments in capitalist system, democratic traditions, public administration, financial auditing, performance evaluation, computer technology, and internet. In Pakistan it evolved around audit of public enterprises and development projects by using methodology developed by expatriate consultants. Main achievements of SAI of Pakistan are in training of auditors and development of indigenous methodology. Despite thirty years of practice, there are challenges ahead.
JEL Classification Codes: H83, L38, M42, P17
1. Global Evolution of Performance Auditing
Performance auditing is a recent expansion in the scope of financial auditing. Traditionally, financial auditing has been concerned with financial control and accuracy of accounts. Historically, a single auditor used to check the accounts. The scope of audit was usually one hundred per cent checking. For centuries, it had been like that. With the advent of Industrial Revolution and Joint Stock Company, it became difficult for a single person to check hundred percent transactions. It led to, at least, two changes. First, the single-person auditing gave way to team auditing. Second, hundred percent checking became impossible and the auditors adopted sample testing. Simultaneously, the auditors realized that it was not possible to certify accuracy of accounts without hundred percent checking. This gave way to transformation of the role of auditors: from certification of the accuracy of accounts to the expression of opinion on the truth and fairness of accounts. These developments were quite slow by themselves. But they were all the slower in government auditing. In the government sector, the auditors had been concerned with regularity of expenditure and compliance to rules and regulations. They had also been reporting about leakages in revenue collection and waste of public funds. This role remained in its rudimentary form for centuries. The government auditors did not react to the developments, which were taking place in the private sector accounting and auditing. There was a state of complacency. But early seventies of the last century noticed beginning of a period of turbulence and change in the role of government auditors. Political leaders started demanding an assurance from the auditors that Paper presented to the participants of the ECOSAI Training course (5-16 Dec 2016) on 5 December 2016 organized by the Performance Audit Wing, Department of the Auditor General of Pakistan, at Pakistan Audit and Accounts Academy, Lahore, Pakistan. 2 makram1000@gmail.com 1
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the value for money spent has been received. The auditors conceived it to be a some sort of value-for money audit. -
The initial years were quite difficult. The conceptual base was thin. The auditing profession itself was not quite sure of its role. The auditees were skeptical of the ability of the auditors to undertake audit of their performance. The traditional auditing procedures did not help and new ones had not yet come up. There was no consensus on the scope, approach, criteria and reporting format of this new type of auditing. But the idea of performance auditing spread like a wild fire. The government auditors, who had not innovated in their scope, approach and procedures for centuries, found themselves wrestling with this gigantic challenge. They left the private sector auditors far behind in this field. There was a general awareness among the government auditors that they should come out of their cocoons and respond to the expectations of their people. The first such manifestation came in 1977 when Ninth Congress of the International Organization of Supreme Audit Institutions (INTOSAI) in its Lima Declaration drew attention to performance auditing although only a few countries had been involved in it by then. Section 4 (2) of Lima Declaration says: 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 organizational and administrative systems
After that several countries amended their audit laws to expand the scope of audit to include value-for-money (VFM) examinations by the Supreme Audit Institutions (SAIs). Several developing countries also followed suit. Korea, Malaysia, the Philippines, Sri Lanka, to name a few, were among those few developing countries which amended their audit laws to incorporate VFM examinations. Several other countries, prominent among them India, Pakistan, and the United Kingdom started performance auditing without a formal change in their laws. (The U.K. law was subsequently amended in 1984.) In brief, performance auditing caught the attention of the legislators and the government auditors almost everywhere within a short span of twenty years. During the last four decades, there had been hardly any international moot of the government auditors where performance auditing did not come under discussion. These four decades have seen immense intellectual activity in methodology development and research in the field of performance auditing. The initial years of uncertainty are now over. Gradually, consensus is emerging in the areas of scope, approach, methodology, reporting format and the role of performance auditors. INTOSAI Auditing Standards and the auditing standards issued by several individual countries incorporate standards of work for the performance auditors. SAIs of several countries have undertaken research in the methodology of performance auditing. Although, the terrain of performance auditing is still rough, the difficulty of initial days, when performance auditors would take a leap almost in the dark, is over. Several factors played a significant role in the evolution of performance auditing. In the following discussion we shall enumerate some of the important factors which led to evolution of performance auditing as a going concern for Supreme Audit Institutions.
DEVELOPMENTS IN CAPITALIST SYSTEM 2
After the two World Wars large parts of Europe and Asia were devastated and required reconstruction. That led to revolutionary thinking in economics and politics. Although the situation affected many areas, we shall enumerate only three most important areas which made a significant impact on the business of the governments and thus to the functions of the finance managers, accountants and auditors:
a) Expansion in public sector: Although capitalist system functioned mainly through free markets and private sector initiatives, the aftermath of World War II made it mandatory for governments to play active role in stimulating economies. Keynesian thinking influenced most of the political decision-making in this regard. The idea was that the economies cannot achieve full employment or reach equilibrium until the governments undertake public spending. It was so imminent, thought Keynes, that if the governments have nothing to spend money on, they should engage people in digging holes and filling them in the evening and pay them for this. With this money, aggregate demand of the economy would get a boost and stimulate investment for matching aggregate supplies. In brief, the emphasis on government spending caught fire around the globe and many governments undertook to spend money for supporting employment and economic equilibrium. Large number of public sector development projects were conceived for building infrastructure and enhancing capacity of the governments for better service delivery. b) Social security Network: Another significant development was general consensus among Western governments for providing social security to the unemployed, the sick and the disabled. That had important implications for public financial management, administration of benefits, employment patterns, and health and education arrangements. The governments created elaborated systems for managing the social security benefits and controlling their misuse and abuse. c) Nationalization: Under pressure from developments in the socialist countries and demands for greater social justice, various governments undertook nationalization of industries, banks, insurance companies, and educational institutions. Consequently, the public sector expanded further and created great challenges for delivering services and goods in a comparably equal, if not better, manner as the private sector used to deliver prior to privatization.
These changes in the capitalist system generated a huge demand for getting value for money from public spending. Political leaders started looking up to state audit departments for giving assurance that the money spent from public exchequer was well spent and that value for it was received, though no one was clear what does it mean.
DEVELOPMENTS IN PUBLIC ADMINISTRATION
While the capitalist system was undergoing changes, the concepts of governance and public administration were also evolving. Some of the more important areas which necessitated performance auditing were as follows: 3
a) Accountability: The concept of accountability got innovative expansions. Firstly, it was popularly accepted that everyone, without exception is accountable for the management of resources, for delivery of services and for the trust reposed in him or her. For the first time in human history, it was now generally advocated that even those who hold high political offices like ministers, prime ministers, presidents, members of parliaments and senior civil servants, generals and judges, not to speak of all public servants, are accountable for their responsibilities. Secondly, all public servants were deemed to be responsible for public financial management as well in their respective area of responsibility. Thirdly, accountability got a positive meaning. From blaming and shaming, it became a tool for improvement and better results. Fourth, accountability was conceived in an institutional framework. Institutions like the auditor general, ombudsman and anti-corruption bureaus were created in all modern states for enforcing accountability. It was no more only a moral pleading. It was to be enforced with a bite. b) Service delivery: Another major development in public administration was that it was conceived as a forum for delivering public services. All public employees were considered as public servants and they were expected to perform their functions in manner which is least wasteful, extremely efficient and satisfies the public at large. c) Justice and fairness: The concepts of justice and fairness in public administration got a popular voice. Despite emphasis on equality before law, accountability of all, fairness in respect of those who were disadvantaged by birth or accidents of life or circumstances (pensioners, widows and children) were considered to have a prior right over those who have normal merit in receiving public benefits, including employment.
These developments in public administration created a demand for some sort of assurance that the public funds were being managed economically, efficiently and effectively. Political leaders looked up to the supreme audit institutions for this assurance, although the contours of assurance were still hazy and blurred.
DEVELOPMENTS IN FINANCIAL ACCOUNTING AND AUDITING
While concepts of public administration and capitalist economic system were undergoing change, the accounting profession and auditors did not sit idle. There was intensively thinking about the role of accountants and auditors in the capitalist system. Several significant changes in the concepts and practice of financial management, financial accounting and financial auditing took place in this period:
a) Risk-based auditing: Traditionally, the financial auditors evaluated internal controls and defined their sample size and conducted audit. However, with enhanced risks in capitalist system due to dynamic changes in the role of banks, financial institutions, stock exchanges, foreign exchange markets, globalization, increased mobility of human resources and obsolescence due to technological development, corruption, fraud, and money laundering, risk assessment became a standard tool for audit planning and audit management. It did not 4
b) c) d)
e)
replace internal control evaluation but relegated it to a secondary position. All audits must now be planned considering risk-based assessment. Auditing standards: Auditing became a more rigorous and formal discipline. Instead of being a apprenticed-based on the on-the-job learning process, it became an academic discipline with its standards for practice, control and quality assurance. Audit certificate: A lot of attention was now being paid to the language of the audit certificate. It defined the scope of auditor’s work and the extent of his or her responsibility. Audit supervision: Performance auditing borrowed the concept and standard of audit supervision from financial auditing. However, because of the complexity of the subject matter of performance audit, the concept of audit supervision has evolved into supervision by consultants for specific audit assignments. For example, for audit of defense procurement, performance auditors would require supervision and guidance of retired senior military personnel, which situation never arises in case of financial auditing. Training of auditors: Financial auditing standards require continuous training of auditors. Performance auditors also follow this standard. However, training of performance auditors is much more complex. It has an expanded scope and requires inputs from specialists of various disciplines, while financial auditors can undergo training by normal training arrangements for auditors.
These and similar developments in financial auditing influenced the growth and evolution of performance auditing as well. Performance auditors are also now adopting risk-based planning. They are struggling to define the language of audit certificate and auditing standards for performance auditing. These are future challenges of performance audits.
DEVELOPMENTS IN PERFORMANCE EVALUATION
Performance evaluation, as a sister discipline was in vogue when call for performance auditing was raised. The SAIs which took the initiative of implementing performance auditing, naturally, took into consideration the theory and practice of performance evaluation. Although the two disciplines are quite close to each other yet there are differences of approach, methodology and criteria. For example, performance evaluation has a stronger focus on effectiveness of policy, while performance auditing focuses mainly on administration of the programs. Performance audits are always conducted independently by Supreme Audit Institutions or other auditors who are independent of the executive. Performance evaluation may not be independent of the program management in all cases. There are other differences as well. Developments in theory and practice of evaluation influenced the evolution of performance auditing in several ways. Some of these were as follows:
a) Methodology and approach: In the absence of any existing methodology, performance
auditors borrowed from performance evaluation its standard technique relating to planning, implementing and reporting of results. They adopted a similar method of data collection and data analysis. If we compare performance audit manuals and performance evaluation guides we find remarkable similarities. 5
b) Impact evaluation: Performance evaluation had been focusing on impact evaluation. Performance auditors also started talking of impact evaluation but soon found that they do not have the necessary expertise and training. Despite that impact evaluation is still on the agenda of performance auditing. c) Field survey methods: Performance evaluation uses, as a standard technique, field survey methods. Performance auditors were quick to adopt this technique and started using it as a normal auditing function. It was not in vogue in traditional financial audits and compliance audits of the SAIs. d) Evidence from outside sources: Traditionally, auditors had been relying on the records of the organization they audited except verification of bank statements or other financial instruments from banks. When they started conducting performance audits they found the existing methodology wanting for their objectives. Performance evaluation was already in the business of collecting information from outside sources. Performance auditors found it as an appropriate method. They adopted the methodology of collecting information both from inside and outside sources.
DEVELOPMENTS IN TECHNOLOGY
Developments in technology also played a significant role in the evolution of performance audit in a short time. Some of the more important developments are as follows:
a) Computer technology: Need not be said that developments in computer technology made the task of performance auditors immensely easy. Imagine a world where performance auditors have to collect and analyze data relating to vast projects and socio-economic service delivery systems for long periods of time. It would have taken them years to do that work. By the time they had gathered all the information it would have become useless. By using computers auditors can now collect, process and analyze vast amounts of data in days and present their reports quickly. Computers provided tools for speed, accuracy and data sharing at a very low cost. Computers have also facilitated audit reporting processes and techniques. Performance auditors used computers for attractive presentation of reports. b) Internet: Performance auditing is actually a research assignment and requires consultation and review of publications and sources of data published around the globe. Internet made it possible to do so at no or minimal cost. Without internet, the evolution of performance audit would have been a case of stunted growth. Computers and internet made it possible to conduct online survey, gather information through data mining, and build complex audit models which focused on multiple variables and processed data immensely quickly.
DEVELOPMENTS IN KNOWLEDGE CREATION
a) Knowledge sharing: The last four decades have seen a revolution in the concepts of knowledge creation through knowledge sharing. It is now generally agreed that the true democracy requires sharing of knowledge and information at no or minimal cost so that those with unequal opportunities or with a handicap are also able to participate in wealth creation and wealth sharing. Emergence of internet and social media at almost no cost and availability of knowledge freely on various websites is an evidence of this thinking. For example, World Bank and Asian Development Bank and other multilateral financial institutions have started publishing information and documents on their websites for free 6
b)
c)
d)
e)
access. For auditors, INTOSAI and other similar inter-regional organization publish information and documents for free download. SAIs of all developed countries publish their documents for free access, some of which pertain to performance auditing as well. There are other large number of organizations which are doing the same. The whole process of information sharing has made the job of performance auditors immensely easy. Auditors can borrow and share knowledge from other SAIs freely. Audit guides, audit reports, audit case studies are now freely available and performance audits can find what is happening in various areas of their interest. Knowledge management: There are significant developments in concepts of knowledge management. Organizations now put in place systems to capture and store knowledge created during the past years. This knowledge could be in memories of the staff, retiring employees, or organizational documents. Communities of practitioners (CoPs) have sprung up in various disciplines for sharing knowledge. Systems are being created to organize this knowledge and make accessible to coming generations for guidance. For example, when an organization is planning to undertake a large procurement, a record of the previous experience, not only in formal minutes but also in memories of those who were involved – a large number of informal and anecdotal events – could help current managers learn lessons. This information is also available to performance auditors. They can also put their work in a perspective and give it a context. INTOSAI leadership role: INTOSAI has played remarkable in developing performance audit theory and practice. It has sponsored and supported training programs on performance auditing for developing countries. Through INTOSAI Development Initiative (IDI), it has provided training to auditors of developing countries at very low cost. Similarly, it has published guidance on performance auditing3 and publishes International Journal on Government Auditing which carries articles of interest for performance auditors. Contribution of Canadian Comprehensive Auditing Foundation (CCAF): CCAF was established in 1980 for promoting comprehensive auditing, which was the name given to expanded scope of audit in those days. For the last 36 years it has trained hundreds of auditors in performance auditing. All of them are from developing countries of Asia, Africa, and Latin America. Some of the auditors trained by CCAF became auditors general in their countries. Thus the CCAF was able to influence the evolution and spread of performance auditing through training of auditors. Besides, it has published a lot of material based on its research relating to performance audit theory and practice4. CCAF is pioneer in promoting the concept of performance measurement and performance reporting. Contribution of SAI of Pakistan: Various SAIs launched programs for training of auditors in performance auditing. Some of them opened these programs to international auditors as
For example, INTOSAI Standards ISSAI 3000 and 3100 deal with standards on performance audit. For example, see: Leclerc, Guy, W. David Moynagh, Jean-Pierre Boisclair, Hugh R. Hanson. 1996. Accountability, performance reporting and comprehensive audit: An integrated approach. Ottawa: Canadian Comprehensive Auditing Foundation. 3 4
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well. Pakistan is a leader in this area. She started hosting training programs for auditors of other countries since early eighties, including ECOSAI region at no cost to the participating auditors or their countries. She provides all training materials to these participants free of cost and also bears hospitality expenses.
DEVELOPMENTS IN TRAINING SKILLS
Traditionally, training of auditors consisted of some class-room lectures explaining various rules and regulations applicable to audit and then a prolonged on-the-job training under supervision of seniors. This was a period of apprenticeship where the juniors learnt their jobs by practicing. Although there is a lot of merit in this type of training, yet it is restrictive in its scope. Not many people can be trained in this manner. For a young discipline, like performance auditing, it would restrict the outreach to a few persons. While performance auditing was taking birth, significant changes were happening in training skills. Various international bodies like INTOSAI, CCAF, and training wings of multilateral banks like the World Bank and the IMF made important contributions in making training effective and interesting. The training pedagogy adopted methods of interactive training by using techniques of group work, case study methods, discussion forums, class-room quizzes, power point presentations, real-life problem solving through field visits, video-tapes and brain storming techniques, to mention some of the techniques in vogue. Performance auditors were quick to adopt these techniques. These have now become normal practice in most training courses on performance auditing. In this approach, computer technology, mentioned above, was of great help. By adopting modern training skills performance auditors were able to spread knowledge of this new discipline quickly and to a large number of persons.
DEVELOPMENT OF PERFORMANCE AUDIT FRAMEWORK AND METHODOLOGY
a) Name of the new discipline: Like all new disciplines, performance auditing also underwent, and are still undergoing, a process of change. In the earlier period, when the auditors were called upon to undertake this type of audit, they were not sure what name to give to this audit activity. Audit offices around the globe used different terms to denote this activity. In 1993, I wrote (as an un-named contributor) about the ambiguity in the nomenclature of the new discipline as follows5: The Terminology Jungle
 
The expansion in the scope of auditing though took place in a short span of time, yet it manifested in a spurt of terms and expressions. A jungle of terms grew up. People started talking of performance auditing in different terms. Some of the more common expressions were as follows: Performance auditing
Comprehensive auditing
Performance Audit Guide- Book I: Introduction to Performance Audit. 1993. Lahore: Department of the Auditor General of Pakistan, pp.7-8. 5
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Value-for-money auditing
Operations auditing
Management auditing
Economy auditing
Effectiveness auditing
Efficiency auditing
Preventive auditing
System-oriented effectiveness auditing Performance evaluation
Project auditing
Program evaluation
Program auditing
With the passage of time the SAIs around the globe have now accepted performance auditing as the nomenclature for this new discipline. The CCAF which originally promoted ‘comprehensive auditing’ has also adopted performance auditing as the appropriate term for this innovative methodology.
b) Definition of the new discipline: In the beginning, several audit offices coined their definitions for this new disciplines6. However most of these definitions agreed on the following:
First, public business should be conducted in a way that makes the best possible use of public resources. Public managers should ensure that their decisions are not only legal and ethical but also done with due regard for economy, efficiency and effectiveness7. The persons responsible for managing public resources should adopt generally accepted management practices.
Second, the people who conduct public business should be accountable for prudent and effective management of the resources entrusted to them. The legislatures confer responsibility upon public managers for performing certain functions for which purpose they get authority on management of certain resources. In return, the legislatures expect the public managers to account for management of these resources and demonstrate the results achieved as compared to what was expected. Auditing is a super-imposed activity on this relationship of accountability. The auditors provide assurance to the legislatures that the account rendered by the public managers about their performance is fair and true. In the context of financial
For a sample of definitions of performance auditing see the present writer’s A Practitioner’ Guide to Performance Auditing. 2009, 2006. California: Pleier Corporation. 7 In the earlier years there were talks about expanding the scope of performance auditing further by including two more Es: Environment and Ethics. However, these discussions soon gave to the more dominant and acceptable way for three Es. 6
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auditing this assurance is provided to the extent of financial accounts. But in the context of performance auditing this assurance extends to operational reports rendered by the public managers.
However, now INTOSAI has published its definition of performance auditing which is as follows8: INTOSAI definition
As carried out by SAIs, performance auditing is an independent, objective and reliable examination of whether government undertakings, systems, operations, programs, activities or organizations are operating in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement.
This is a milestone in the development of performance auditing.
c) Why performance auditing? Although the demand for performance auditing came from political elites with a view to get assurance on value for money spent, the SAIs conditioned by their culture of fault-finding and ‘catching the thief’ psychology were a bit confused about their exact role in this type of auditing. They kept on reporting horror stories and lacunas in compliance with rules. Twelfth Congress of INTOSAI held at Sydney in April 1986 defined the objectives of performance auditing as follows:
Provision of a basis for the improvement of public sector management.
Encouragement of public sector management to introduce process for reporting on performance.
Improvement in the quality of information on the results of public sector management that is available to policy makers, legislators and the general community. Provision for more adequate accountability.
The above statement clarifies that the performance auditing is a means for (1) improving management practices in the public sector and (2) sharpening the accountability process of public managers.
d) Methodology and approach of performance auditing: In the beginning, SAIs were not sure how to go about this activity. They were traditionally conducting compliance and finance audits and now there were new demands for this expanded scope of auditing. Some of them adopted the approach of combining all these audits in one assignment and call it comprehensive audit. Others tried to do all the three audits separately. But then the timing of reporting to PAC and cross-references to other types of audits in performance reports and vice versa raised questions which the SAIs were unable to handle easily. Gradually, the practice of performance audit has standardized. It is now generally accepted that performance audits should be properly planned, supervised and reported as a standalone 8
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INTOSAI. nd. ISSAI 300 – Fundamental Principles of Performance Auditing. Vienna: INTOSAI Secretariat. Pp.2
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e)
activity. Performance auditors can collect evidence from all sources, including from outside the auditee organization. The debate about audit criteria has also generally settled. They should be the generally accepted good practice in the field and also planning targets of thee. However, there are still questions about the reporting format, to which question we now turn. Reporting performance audit results: Traditionally, auditors have been reporting results of financial audit in the form of audit certificates and results of compliance audit in the form of exceptions noted in compliance. In particular, the compliance audit reports systematically blacked out any mention of the good work done or achievements made by the auditee. In fact, the total image of government auditors is that they are negative people, motivated and trained to find faults and are stubborn people so far as their reports are concerned. They would not easily give in in arguments with the auditee, howsoever is their point out of place and irrational. Performance auditing has changed all this. Standard practice of performance audit is to acknowledge, in the beginning of the report, whatever, good work the auditee has done and then to point out shortcomings in performance with reference to auditee’s own plans with a view to improving things. This is a major breakthrough in auditing practice. However, the performance auditors are still far behind the dream of issuing an audit certificate as financial auditors do.
2. Evolution of Performance Auditing in Pakistan HISTORY AND EVOLUTION
(a) Mass scale nationalization: The Bhutto government (1972-77) in seventies undertook mass scale nationalization of banks, insurance companies, educational institutions, hospitals and industries. Government servants with little expertise in these areas became bosses and managers. Their performance came to be criticized for obvious reasons. Gradually, the Government felt need for evaluating public enterprises. At that time, in other parts of the world also, there was a wave of evaluation activities. The socialist governments around the globe were spearheading the movement for evaluation of public enterprises. For example, Yugoslavia had a well-developed center for evaluating public enterprises. During early days of Zia regime (1977-1988), Ghulam Ishaq Khan9 championed evaluation of public enterprises asked the Auditor General of Pakistan (AGP) undertake evaluation of public enterprises. The AGP did not have expertise for this new assignment. However, in 1980 the government was able to get Dutch technical assistance for developing expertise in performance evaluation. Ghulam Ishaq Khan was an influential member of the ruling elite. He held various senior positions including federal secretary of finance and finance minister during the Zia regime and subsequently the President of Pakistan. 9
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(b) Performance evaluation of public enterprises: The AGP’s department created Performance Evaluation Cell (PEC) and posted bright officers for learning performance evaluation techniques. The methodology for evaluation was developed by BMB Consultants, a management consultancy firm based in the Netherlands through Dutch Technical Assistance. The PEC produced reports of high quality which were acclaimed both by the executive departments as well as PACs.
(c) Performance audit of development projects: Encouraged by the experience, and by the time the Dutch Technical Assistance came to close in 1981, the AGP decided to apply the concept of value for money auditing to development projects. With this performance auditing was born in the AGP’s department. The Dutch government again agreed to finance the development of performance audit methodology, train auditors and kick-start the work on performance auditing. The project was implemented by BMB consultants.
(d) The first Dutch technical assistance project (1981-1986): This project trained a large number of auditors (exact figure not available) and 12 volumes of PA Guidelines. Besides, the consultants provided supervision and guidance to field auditors. They provided hands-on support to auditors by visiting auditors in the field while the audits were in progress. (e) The second Dutch technical assistance project (1991-1993): In 1990 the AGP again requested the Dutch government for technical assistance to strengthen performance auditing in the department. The project was implemented by BMB Consultants. Some of main achievements of this project were publication of 9 volumes of PA guidelines in project auditing, four volumes of performance audit guides on audit methodology. (I had the privilege of writing the first volume of these guides, though the published version does not carry my name). Besides, the BMB consultants provided supervision to field auditors in conducting performance audits and reporting results of audit. ACHIEVEMENTS DURING THE FIRST TWO DECADES
(a) Role of Performance Audit Wing in training of auditors: With the decision to implement performance auditing, the Auditor General set up a Performance Audit Wing (PAW) in his office to be supervised closely by him. The main mandate of PAW was to develop methodology and train auditors in performance auditing. The methodology part was taken up by consultants under two programs of technical assistance from the Dutch government. Training of performance auditors was also initially started by the consultants who trained master trainers. Since 1984, however, PAW is now conducting various training programs independently. PAW is largely a training outfit and imparts training courses for local auditors as well for international 12
auditors. Intensive Training Program (ITP) is a flagship of PAW. It has held 97 ITPs since 1983 in which 1702 auditors have been trained.
(b) In 2010, with the help of World Bank, a team of 10 auditors were trained in classroom as well as field training. The auditors remained under supervision from planning to reporting stages. It was presumed that these auditors would train further teams of auditors in a similar manner.
(c) In 2011, the AGP issued the Performance Audit Manual, which was written by the present writer. (d) Successive Auditors General encouraged and supported performance auditing and encouraged auditors to participate in promoting this activity. A flurry of activity took place after initial push by the Dutch technical assistance: training of auditors; workshops and seminars; agenda items in the AGs conferences. Several workshops and seminar at capital cities and Railway Accounts Academy Quetta were held every year. Other significant activities were as follows:
National seminar on PA in Pakistan (1986)
ASOSAI-supported seminar in collaboration with OAG Canada in which 26 countries participated (1993) on PA of foreign aided projects
International seminar on PA in Pakistan held by Dutch Government in the Hague (1986)
Pak-China seminar (1995) on PA of state-owned enterprises Pak-China seminar (1998) on PA of Foreign Aid
Pak-Bangladesh Seminar (1999) on PA as an aid for public administration First ECOSAI Training Seminar on PA (2002)
Commonwealth Secretariat sponsored five-week ITP program for Commonwealth Countries
Two week program on Performance Audit of a Revenue Agency for ECOSAI member countries
Two days National Seminar on Performance Audit – Trends and Challenges at Muzaffarabad, Azad Jammu & Kashmir in 2014 13
(e) Publication of guidelines: The AGP published 12 volumes in the first phase and nine volumes in the second phase of performance audit guidelines under Dutch technical assistance program. It is the largest set of guidelines ever published by any SAI. It is an encyclopedic work. Besides, Performance Audit Guides (Book 1-4) (as compared to Guidelines) were also published during 1990-93. (f) Publication of Performit: A quarterly journal, namely, started. It evolved from a simple newsletter to a refereed journal. Perhaps, it was the first ever and the only journal exclusively devoted to PA
(g) Contributions to international journals: Officers of the department contributed papers to INTOSAI, ASOSAI and other professional journals, like the Internal Auditor. Mr. A R Arif got INTOSAI award for contributing a paper in the INTOSAI Journal of Government Auditing on Performance Audit of Human Resource Management. (h) Training auditors in other countries: Several countries invited the department of the AGP to send trainers for imparting training to their auditors. We conducted training in China, Malaysia, and Saudi Arabia on performance auditing. Pakistan became a global champion in imparting training. Some important activities were as follows:
We conducted a three-day workshop on performance auditing in 1987 for the senior management of the Islamic Development Bank under the supervision of former Auditor General, Mr. Raouf Sheikh. We conducted a two-week training program on performance auditing in 1990 for International Islamic University Management Centre, Kuala Lumpur, Malaysia. In 1992, we conducted a four-week training program for Chinese auditors at Shanghai on performance auditing and performance evaluation. PAW organized a two-Week training program on Performance Auditing for ECOSAI member countries in partnership with the Islamic Development Bank. PAW conducted three ITPs for Elementary, Intermediate and Advanced levels d at Riyadh Jeddah on the request of the Auditor General of General Auditing Bureau of Saudi Arabia in 2011, 2012 & 2013.
Three Week ITP program conducted at UAE on request of the Auditor General of United Arab Emirates in 2013.
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(i) International Intensive Training Programs: So far PAW have accepted and trained about 350 auditors from 33 countries in its ITP. This is still going on. The present program is one of the series of the ITPs
(j) Training of auditors by Canadian Comprehensive Auditing Foundation (CCAF): Six officers of the department went to Canada (1983-1988) for training in PA. This was, by then, the largest number of auditors trained by CCAF from any one country. Canadians were impressed by the contributions made by their trainees back home on their return. (k) The establishment of Economic Cooperation Organization Supreme Audit Institutions (ECOSAI): Economic Cooperation Organization (ECO) was established in 1985 regional cooperation among Iran, Pakistan and Turkey. The SAI of Pakistan took the initiative and invited SAIs of the member countries to join hands for forming a joint forum of SAIs of ECO countries. The main objective of this forum was to share knowledge and expertise and provide mutual help in training of auditors in auditing, particularly, in performance auditing. First assembly was held in Pakistan during 1719 April 1994 at Murree. At that time ECO consisted of only three countries: Iran, Pakistan and Turkey. In the first assembly, SAI of Turkey was elected as President of ECOSAI and SAI of Pakistan as Secretary General. It was also decided that permanent secretariat of ECOSAI would be at Islamabad. In the first assembly, decisions were made about joint training programs and funding of the organization. It is unfortunate to say that when ECOSAI approached INTOSAI to recognize it as a regional body of INTOSAI, they refused to do so. Subsequently, with expansion in ECO, the members of ECOSAI have also increased to SAIs of 11 countries.
3. Challenges Faced by SAIs in Promoting Performance Audit
SUPPLY DRIVEN EFFORT
The audit law should give specific and explicit authority to SAI for conducting PA, making the departments and ministries liable for cooperating with the SAIs. At present SAIs of developing countries do not have sufficient political support for PA. There is a lot of concern about corruption and bad governance. Yet the political leaderships generally do not have vision to ask for PA. Since the political support is inadequate, financial and human resources for PA are not provided.
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Parliaments in developing countries do not attach much importance to performance audit. In most of these countries the issue has never been on the agenda of the parliaments.
The PACs have not, historically shown much interest in PA audit reports. It has the negative effect of discouraging the auditors and the audit leadership also adopts a lukewarm attitude toward PA.
The executive departments do not know much about PA. They would prefer to attend to government auditors doing compliance audit in preference to PA, treating the latter as wasters of time. Hardly ever a secretary of the department would request for a PA of his or her department
AUDIT MANGEMENT
Technical knowledge, human and financial resources
PA requires technical skills in various disciplines. Besides knowledge of accounting and auditing, the auditors need skills in statistics, economics, management, law and public administration. Besides, it requires some technical knowledge about the department or function under audit. This could require getting help from specialists of the field under audit. It means in most cases, the auditors would require help from consultants. That requires additional financial and human resources. The SAIs do not have these resources and also do have the political support for obtaining these resources.
The problem of audit criteria
One of the requirements for performance audit is that it should be conducted against valid criteria. Since each audit assignment is peculiar in nature, it requires setting up of the audit criteria which is specific to it. Setting up of audit criteria requires, at least:
A readily available and accessible data base of audit criteria set in previous audits for stimulating thinking and making a beginning in a new audit assignment Knowledge of the generally accepted good practice in field to which the audit assignment belongs Agreement of the auditee to the criteria proposed by audit
Most of the SAIs do not have these resources. That makes the job of performance auditors very difficult. 16
Availability of data
For conducting performance audit in a reasonable time, it is necessary that the executive departments have maintained the performance data in an appropriate format. However, in most of the developing countries the departments and program managers do not keep performance data which can be used easily by the auditors. Consequently, they either collect the data themselves or conduct a sub-standard audit which can be challenged and refuted by the auditee easily. Knowledge sharing
Most of the SAIs have started conducting Pas in some form or the other. However, there is no common knowledge portal for sharing the information on technical details of the audit. For example, there is hardly any information available on the audit plans, audit issues, audit criteria, audit analysis on audits conducted by various SAIs. Supervision and guidance
In actual practice the auditors face difficulties in conducting audits. These difficulties pertain both to the technical side the audit assignment as well as operational side which requires ready cooperation of the executive authorities. The auditors in the field do not have access to any central center of excellence for seeking guidance nor do they get help from their own management in dealing with the executive. The level of field auditors is also not very high. The executive find it difficult to enter into a technical dialogue with them Quality of reports
The PACs and even the executive departments are more concerned about ‘horror stories’ in audit reports. Once they see PA do not contain such material, they lose interest in the reports. That has de-motivating effect on the morale of the auditors as well.
4. Future Evolution of Performance Auditing
Performance auditing has come a long way since its inception in the early seventies of the last centuries. Its basic framework, objectives, approach, methodology and reporting patterns have standardized, by and large. However, like all living disciplines, it still faces challenges which can show the way for its future growth. We shall mention below some of the areas where future growth can and should take place:
a) The Question of Audit Certificate: How can the performance auditors issue a concise certificate like that of financial auditors? The question has been nagging the minds of performance auditors. The problem is that the performance auditors still do not have a set of audit criteria which they can apply for all audits. Each audit requires a new set of audit criteria. Once you audit against a specific criteria, the report has to be with reference to that very criteria. The question of one certificate for all audits vanishes in the air. However, new 17
b)
c)
d)
e)
thinking in the field shows light at the end of the tunnel. The future of performance auditing lies in adopting this thinking, as discussed below; Instead of developing audit criteria for all performance audits, the executive departments should be provided technical assistance for developing their performance indicators. It is a long-drawn process and would require extensive training within executive deportments. Once the departments develop their performance indicators, they should be encouraged to set up infrastructure for collecting and analyzing data around these indicators. As a third step, all departments should put in place means to measure their own performance and report it in the form of a performance measurement report. As a final steps, the auditors should adopt the performance measurement report of the department as their criteria and verify it like the financial auditors verify the financial the financial statements. This methodology will enable the auditors to formulate their opinion on the veracity of the performance measurement report prepared by the departments themselves. The language of the audit certificates can then be standardized. Political and Legislative Support: The future development of performance audit requires political and legislative support. The parliament should specifically ask the SAIs to devote human and financial resources for this audit and to present reports. In fact, the parliaments should even suggest some of the areas for current performance audit every year. Allocation of budget for performance audit: Public financial management should recognize the significance of performance audit and specifically devote a segment of resources for development of performance measurement systems in executive departments and for performance audits by the SAIs. Until the Ministry of finance and the SAI work jointly to lead this project, the performance auditing would not grow any further. Human resource management for performance audit: The SAIs face the problem of depletion of trained manpower as officers move to other departments or leave service or retire. There is a need for a long-term strategy to overcome this constraint. Perhaps, a better incentive system for trained performance auditors, continuous training, and recognition of their services at appropriate forums could help. Marketing of performance audit: There is a need for enhancing awareness about the benefits of performance audits among the political elite as well executive departments. The SAIs can play a leadership in this regard. However, they should remain vigilant that corruption among politicians and senior executives would make their task quite difficult. The corrupt politicians and officials would feel threatened by performance audits and like to resist it. Public accounts committees also need to be exposed to the benefits of the performance auditing. They are still looking for ‘horror stories’ in the audit reports. They find performance audit reports too academic and boring. SAIs need to improve the presentation 18
of audit reports besides taking a lead to better inform the PACs about the utility of the performance audit reports. f) Centers of excellence: SAIs need to set up centers of excellence for providing continuous guidance and support to field performance auditors. For purposes of supervision, they should have the authority and funds to hire consultants for specific audits. g) Website of SAIs: The SAIs should allocate space in their websites for publishing technical material, audit plan, audit reports, and auditee feedbacks on various performance audit projects. These websites should also make freely available all performance audit reports (subject to sensitivity of various subjects). There should a plat forms for online discussion on various auditing issues being faced by auditors and a minimum level of guidance that can be provided for moderating the discussion. The discussion forum should welcome participation of other SAIs staff.
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References Department of the Auditor General of Pakistan. 2011. Performance audit manual. Islamabad. INTOSAI. 1998. Lima declaration. Vienna. INTOSAI Secretariat.
INTOSAI. nd. ISSAI 300 – Fundamental Principles of Performance Auditing. Vienna: INTOSAI Secretariat.
Khan, Muhammad Akram. 2009, 2006. A practitioner’s guide to performance auditing. California, USA: J. Pleier Corporation. Leclerrc, Guy, W. David Moynagh, Jean-Pierre Boisclair, Hugh R. Hanson. 1996. Accountability, performance reporting and comprehensive audit: An integrated approach. Ottawa: Canadian Comprehensive Auditing Foundation.
Performance Audit Wing. 1993. Performance Audit Guide- Book I: Introduction to Performance Audit. Lahore: Department of the Auditor General of Pakistan. Performance Audit Wing. 1981-86. Performance Audit Guidelines- Volumes 1-12. Lahore: Department of the Auditor General of Pakistan.
Performance Audit Wing. 1990-93. Performance Audit Guidelines- Volumes 13-21. Lahore: Department of the Auditor General of Pakistan.
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