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Increasingly, Supreme Audit Institutions in most countries (e.g., the US Government Accountability Office, the UK’s National Audit Office) are allocating a greater share of their resources in order to conduct Performance Audits of government entities. Yet serious academic work examining the methodological foundations of Performance Auditing is conspicuous by its absence in the extant literature on Performance Auditing. In what follows, I will argue that it is time to rethink the Performance Audit Methodology and offer a possible way forward.
Much of the literature on the subject comes from various Supreme Audit Institutions. Academics have either only elaborated on the methodology adopted by these Supreme Audit Institutions or taken issue with the magnitude and direction of the impact of Performance Audit on the performance of government entities. To my knowledge no one has looked at the basic approach to performance auditing in government.
The dichotomy between “Performance Auditing” and “Financial Auditing” exists only in the government. In the private sector, financial statements are also the performance statements for the company. This is because the performance of a company in the private sector is measured primarily by the bottom line in its financial statement for the year.
The text book definition of ‘Financial Auditing’ is:
It stands to reason that the definition of a “Performance Audit” should parallel that of “Financial Audit” outlined above. In that case, the definition of a “Performance Audit” ought to be:
If we accept the above definition of Performance Auditing, then the inconsistencies between it and the current Performance Audit methodology recommended for use by INTOSAI (International Organization of Supreme Audit Institutions) – which is used by the Comptroller and Auditor General of India (CAG) and many other countries -- becomes obvious.
Another way to visualize this counter-intuitive approach is to imagine an auditor arrives at a private sector company to audit its books and the company gives the auditor many mountains of raw financial data to audit. In private sector, the auditor would not accept the task and ask the company to call them back when the accounts are ready. However, the extant Performance Auditing Methodology recommends the auditor should undertake this task.
In view of these two methodological inconsistencies, most professional evaluators would consider current Performance Audit methodologies as unsatisfactory at best. Other problems highlighted by commentators about the current INTOSAI methodology seem so insignificant in comparison that it is not worth spending time on them until INTOSAI sorts out this fundamental methodological inconsistency.
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This blog is based on Praja Trivedi’s recent working paper entitled, “Auditing the Auditors: Evaluating the Methodology of Performance Audits.” It was recently listed on the Top Ten download list for Corporate Governance Network on Social Science Research Network (SSRN).
** Image courtesy of Stuart Miles at FreeDigitalPhotos.net