Performance Auditing in Pakistan by Muhammed Akram KHAN

PERFORMANCE AUDITING IN PAKISTAN By Muhammad Akram Khan Former Deputy Auditor General of Pakistan makram1000@gmail.com HISTORICAL DEVELOPMENTS Performance auditing in Pakistan became known through the efforts of the Auditor-General. It is still not widely known in the private sector. Although, performance auditing, per se, started in Pakistan in 1981 yet its genesis can be traced to much earlier dates in the history of the Auditor-General's Department. We can notice the seeds of performance auditing in the Audit Code of the Department which was issued by the British colonial government in 1938. In those days the concepts of economy, efficiency, and effectiveness which have now become popular were little known. In fact, we can see that the authors of the Audit Code in those days were not even quite clear about some of the concepts they prescribed. From hindsight, we can now understand that they, perhaps, intended to achieve the same objectives as we now wish to obtain through performance auditing. Some extracts from the Audit Code of the Department of the Auditor-General as developed by the colonial British government but only marginally changed afterwards and in force even at present are as follows: "45. Implicit in the provisions of the Order cited in the preceding Article is the condition that the expenditure should be incurred with due regard to broad and general principles of financial propriety. Any cases involving breach of these principles and thus resulting in improper expenditure or waste of public money should be treated by Audit in the same manner as cases of irregular or unauthorized expenditure." ( Italics added.) "82. Cases may arise in which though no audit objection can be taken to the terms of an order of delegation, or other financial rule, yet the Accountant General feels that the order is likely

to impair seriously the control...."

efficiency of financial

"84. It is an essential function of Audit to bring to light not only cases of clear irregularity but also every matter which in its judgement appears to involve improper expenditure or waste of public money or stores, even though the accounts themselves may be in order and no obvious irregularity occurred... It is of equal importance that the broad principles of orthodox finance are borne in mind not only by disbursing officers but also by sanctioning authorities." (Italics added.) "85. No precise rules can be laid down for regulating the course of audit against propriety. Its object is to support a reasonably high standard of public financial morality, of sound administration, and devotion to the financial interest of the State." (Italics added.) " 95. An essential part of the duties of Audit in relation to borrowing is to see that the proceeds of loans are properly brought to account and whether they are expended only on objects for which the loans were originally raised or to which borrowed moneys may properly be applied in accordance with sound principles of public finance."( Italics added.) These are some of the provisions of the Audit Code which refer to such concepts as broad and general principles of orthodox finance, public financial morality, improper expenditure or waste of public money. These concepts have been refined recently into economy, efficiency and effectiveness. It has now become possible to apply these concepts objectively and meaningfully. Government auditors in Pakistan have been auditing the propriety of public expenditure in a crude manner ever since the Audit Code was implemented. But in 1977 a significant development took place. In a televised speech the then Secretary-General-in- Chief and now the President of Pakistan, Mr. Ghulam Ishaq Khan announced the decison to establish two Performance Evaluation Commissions to obtain analytical evidence for drawing well-based inferences on the performance of public enterprises. The first in the form of a Review Commission to study and analyse the condition of the state industrial enterprises, and the other as a special Permanent Unit to evaluate, on a continuing basis, the

performance of the public sector commercial enterprises. For the second purpose, the Government of Pakistan entrusted the Auditor-General to carry out the necessary evaluations. Thus a new office known as Performance Evaluation Cell (PEC) came into being within the Department of the Auditor-General of Pakistan. This office has been working since 1978. The Performance Evaluation Cell developed its methodology with the Dutch Technical Assistance. The Dutch assistance came in the form consultancy and training provided by a multi-national consulting company Berenschot-MoretBosboom (BMB). The experience of performance evaluation by the Department of the Auditor-General was well-rewarded when both the executive departments and the Public accounts Committees of the National and Provincial Assemblies appreciated the evaluation reports. It gave the Auditor-General satisfaction and encouragement. He decided to extend the concept of performance evaluation to government departments and agencies. That is how performance auditing came to the Department of the Auditor-General. It was in 1980, that the Auditor-General took the decision to start performance auditing of government departments. He set up a directorate of performance auditing known as Performance Audit Wing (PAW) in his office. The role of the Performance Audit Wing was to develop methodology, train auditors and help assure quality of audit in the field. As a first step, the Auditor-General decided to start the performance audit of development projects. But necessary expertise and trained manpower were not available. Once again, the Dutch Government offered a helping hand. Technical assistance, again executed by the BMB, became available in 1981. These were hard years. Methodology to audit a wide variety of development projects having unique performance features was not available. The consultants did the yeoman's effort by developing a series of Performance Audit Guidelines - twelve in number and an encyclopedic work. Besides, the consultants trained the performance auditors and also provided some help in conducting performance audit in the field. The Dutch assistance came to an end in 1986. The Department of the Auditor-General started on the road to performance auditing with a fair amount of confidence. In 1990, the Department felt the need for some more performance audit guidelines as well as to extend the application of performance auditing to programmes, which are much more complex than projects. On the request of the Department, the Dutch assistance became available for the third time. Because of the experience and successful execution of the previous projects, the BMB is executing the third project as well. The present project will terminate, if not extended, by December 1993. On the actual implementation front the Department had carried out the

performance audit of 176 projects by 1992. It had trained over 300 auditors of middle manager level by 1993. By now it has acquired the expertise to train its own auditors besides offering its courses to other countries. The level of training being provided by the Performance Audit Wing is sufficiently high.

THE QUESTION OF AUDIT MANDATE A number of countries revised their audit laws to incorporate performance auditing as the statutory duty of the Supreme Audit Institutions. Such changes initiated a debate within the Department of the Auditor-General of Pakistan about the legitimacy of performance auditing. Some people expressed the apprehension the Auditor-General's initiative to start performance audit may be questioned by the executive departments. Feeling the internal pressure, the Department once did approach the Law Division of the Government of Pakistan to help enact the performance auditing in the statute itself. But the Law Division advised that such an amendment in the law was not called for as the term " audit" was broad enough to cover performance auditing as well. Let us have a look at the law and its meanings. The Pakistan (Audit and Accounts) Order, 1973 [President's Order No.21 of 1973] says: "11. Audit: (1) It shall be the duty of the AuditorGeneral to : (i) audit all expenditure from the revenues of the Federation and the Provinces and to ascertain whether moneys shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged and whether the expenditure conforms to the authority which governs it." This provision and subsequent provisions of the Order authorize the AuditorGeneral to carry out the audit of the expenditure and receipts of the Federation and the Provinces. But the Order does not define the term "audit". For this we shall have to turn to other authoritative pronouncements. Let us see a sample of them.

"Audit:In general, the mechanism within the process of accountability whereby the

performance of those in control of the resources of an organization is checked or monitored by or on behalf of interested parties."1 "Audit: Review of a body's activities and operations to ensure that these are being performed or are functioning in accordance with objectives, budgets, rules and standards. The aim of this review is to identify, at regular intervals, deviations which might require corrective action."2 " Government auditing is the objective, systematic, professional and independent examination of financial, administrative and other operations of a public entity made subsequently to their execution for the purpose of evaluating and verifying them, presenting a report containing explanatory comments on audit findings together with conclusions and recommendations for future actions by the responsible officials and, in the case of the examination of financial statements, expressing the appropriate professional opinion regarding the fairness of their presentation."3 "15. a. The term "audit' includes both financial and performance audits as described in this statement."4 "Audit serves an accountability relationship. It is the independent, objective assessment of the fairness of management's representations on performance or the assessment of management systems and practices, against criteria, reported to 1

Parker, R.H., Macmillan Dictionary of Accounting,, London: Macmillan Press, 1984, Pp.17. 2

Everard P. & D. Wolter, Selection of Terms and Expressions Used in the External Audit of the Public Sector, Vienna: European Court of Audit, 1989. ( Circulated during XIIIth INCOSAI at Berlin.) 3

Handbook on Government Auditing in Developing Countries,, New York: United Nations, 1977, Pp.1. 4

Government Auditing Standards, Washington: GAO, 1988, Pp.1-4.

a governing body or others with similar responsibilities."5 This is a sample of the definitions of audit found in contemporary authoritative sources. It is obvious from these definitions that the term " audit" is no more restricted to the audit of financial transactions. It encompasses in its very meaning examination of the operations, activities, functions, management systems and performance of the organization under audit. Therefore, the question of the mandate of the Auditor-General of Pakistan with regard to performance auditing is only a theoretical discussion. It has been started by some people in the Department, probably, out of their ignorance about the recent developments in the concept and practice of auditing. This assertion is further supported by the fact that the Public Accounts Committees of the Federation and the Provinces have not only accepted performance audit reports without questioning their legitimacy, they have also on several occasions asked for more such examinations. The question of mandate have also never been raised by the auditees. The auditors have faced numerous difficulties in carrying out performance audit, no doubt. But they have never been turned back by the auditees on the pretext of absence of legitimacy. However, for the satisfaction of those who would still like to see something specific in support of Auditor-General's mandate for performance auditing we quote from the decisions of the national Economic Council (NEC), the Supreme decision-making body on economic matters and headed by the Prime Minister. In its decision of 4 July 1988, the NEC decided: "Auditor-General should audit the implementation and performance of the projects." This shows that the highest decision-making body in the country has supported the Auditor-General in carrying out performance audit of projects. However, there is no doubt that an explicit provision in the law passed by the legislature will carry greater force and would alleviate whatever apprehensions are there regarding the authority of the Auditor-General to carry out performance audit.

PERFORMANCE EVALUATION AND PERFORMANCE AUDITING IN 5

Comprehensive Audit Reporting: Concepts, Issues, Practice," Ottawa: Canadian Comprehensive Auditing Foundation, 1991, Pp.32.

PAKISTAN In Pakistan, the Department of the Auditor-General started performance evaluation of public enterprises in 1978. These were the days when the concepts of performance auditing, especially the framework of economy, efficiency and effectiveness was still evolving. The methodology developed by the Dutch consultants for performance evaluation of public enterprises does not use the term of "Three Es". Instead, it defines performance evaluation as " a periodic systematic examination of an organization, conducted to identify its strengths and weaknesses..." The procedure to carry out examination and the focus of examination is very much the same as expressed by the concept of Three Es. In 1981, the Department of the Auditor-General of Pakistan commenced with the performance audit of development projects. The performance audit methodology explicitly used the concept of Three Es. The procedure was very much like that of performance evaluation. But the analytical techniques were quite different. In performance evaluation of public sector enterprises, the main thrust was on judging the performance in the light of good management practices while in performance audit of projects the emphasis was on identifying the economic and financial rates of return of the projects. But shortly after the introduction of this methodology, the Department realized that limiting the performance audit of projects to mere financial and economic rates of return was too restrictive. Therefore, the Department started expanding the criteria for performance audit as well. Now the performance audits of the Department use the criteria of generally accepted management practices as well as economic and financial analysis. Thus the scope of performance auditing has expanded slightly more than the performance evaluation of public enterprises. Another important difference between performance evaluation and performance audit in Pakistan is that the former accepts the data of the public enterprises as presented by them. They do not "audit" the data. Most probably, it is so because the financial audit of most of the public enterprises is carried out either by private accounting firms or by another office within the Department of the AuditorGeneral viz. Directorate of Commercial Audit. The evaluators of Performance Evaluation Cell, therefore, do not audit the data. They only "analyze it against a pre-determined criteria. In the case of performance auditing, the auditors are supposed to "audit" or verify the data presented by the auditees. Afterwards, they analyze it against a predetermined criteria. It is important to note that the distinction between performance evaluation and performance auditing as discussed above is purely a local innovation of Pakistan. In the literature on performance auditing, these terms are used interchangeably. To a person who is not familiar, with the history and evolution of these terms in the Department of the Auditor-General of Pakistan, this distinction is quite

confusing. It takes quite some effort, often unsuccessfully, to explain the difference and reason for using two different terms, to outsiders.

PROBLEMS AND CONSTRAINTS Performance auditing in Pakistan is over ten years old now. It still faces several problems which are restraining its way to become a going concern. Some of these are as follows:

Weak Democratic Tradition Perhaps the biggest problem is embedded in the social structure of the Pakistani society which is highly tolerant of corruption, inefficiency and waste. The democratic tradition is very weak. Performance auditing came into being in the Western societies in response to increased demands for accountability of the public managers. The demand came from the legislatures. The public managers demurred to respond to this demand. The auditors demonstrated their willingness to help the legislature in getting more information on public funds and value-formoney from them. But in a society where democratic traditions are almost nonexistent, such a concept of auditing is surely going to take much longer to take roots. Despite the enthusiasm of the Department of the Auditor-General it has not become very popular in the society as a whole.

The Problem of Supply and Demand The performance auditing is suffering from the problem of excess supply. This may sound to be an unrealistic statement in view of the fact that the Department of the Auditor-General is covering less than 1% of the development projects. The position needs to looked at from the point of view of the users of the performance audit reports. The auditees have hardly ever asked for any performance audit. The legislative select committees on Public Accounts have, in some cases appreciated the performance audit reports. But they do so when the Department presents it. Their interest in this type of work is merely to the extent the Department is doing it of its own volition. As a result, the senior managers of the Department also take it in a lukewarm manner. A more proactive stance of the legislature would certainly ignite greater interest within the Department and make the quality of examination better. The Department has not done sufficient marketing of the concept to the executive departments. Most of the auditee managements are either unsure of the Department's ability to carry out performance audit or skeptical of its utility.

The Resource Constraints Since the Department of the Auditor-General started performance auditing on its own initiative, it does not have sufficient human and financial resources to carry out a high quality examination. For example, it cannot hire consultants for technical examinations. As a result, the performance audits of the Department are restricted to issues which are treated as "trivial" by the auditees.

Motivation of Auditors The performance auditing is a laborious type of work. It requires sustained application of creative abilities which everybody does not possess. The financial auditing or accounting work is fairly mechanical as compared to it. But there are no incentives worth the name for the performance auditors in the Department of the Auditor-General.

Data Availability Performance auditing requires the auditee management to generate some types of data which they are not customarily doing. When the performance auditors approach the auditees to provide information which is not being generated by them on a routine basis, they resist such demand and at times feel threatened. Without a very active support from the Government and the Legislatures the problem cannot be solved.

Feedback Arrangements Whatever audit reports have been produced by the Department of the AuditorGeneral have not been put to any use by the Government. The evidence is that the Government departments are committing the same mistakes year after year. Projects are failing one after the other for same reasons. The Government departments have not learnt any lessons from their own mistakes pointed out by performance audit. There is no institutional arrangement which may feedback the results of performance audit in the planning process of the future projects. This goal seems to be still far away as there is not even much realization of this shortcoming.

Management of Performance Audit There are several problems internal to the Department of the Auditor-General. They pertain to the area of audit management. For example, the planning process for performance auditing does not follow any sharp criteria. There is no strategic vision of the Department regarding performance auditing. The planning decision

are done on the basis of skeleton information, without any risk analysis and the direction for reporting results. Similarly, the audit execution does not follow professionally sound procedures for audit programming and work papers. As a result, audit evidence, sometimes, is not sufficient and competent. There no elaborate guidelines for allocating time to productive and non-productive activities during audit. Consequently, performance audits often take much longer than originally planned.

CONCLUDING REMARKS Performance auditing has a great potential in Pakistan. The auditors are conversant with the concept of auditing against propriety. They only need knowledge of performance auditing as systematically developed during the last two decades. The auditing procedures also need refinements. But this is not a very difficult area. The real challenge before the Department of the AuditorGeneral is in selling the idea to the Legislatures and the auditees. Perhaps a much greater effort is needed in marketing the concept. Similarly, another area of major thrust is to get the resources and authority to engage consultants for technical audits. Once the Department is able to generate good quality reports, the time for institutionalizing the feedback of audit results into the planning process will be ripe.