In public sector accounting, performance audits are essential tools that help ensure government programs and services are delivered properly. These audits focus on five key principles: effective, efficient, economical, ethical, and equitable management of public resources. For accountants involved in government auditing, understanding how to apply these principles during audits is crucial for ensuring that public entities operate not just according to the rules, but also as effectively as possible for the public good.

What Are Performance Audits?

Performance audits are evaluations that go beyond traditional financial audits. Instead of just examining the numbers, these audits look at the broader picture: How well is an organization achieving its goals? Are resources being used in the best possible way? Is there a way to improve operations and outcomes?

Performance Audits in South Africa

These audits are based on rules set out in the Constitution and the Public Audit Act of 2004. They give the Auditor-General the power to check on all the money matters of national, provincial, and local governments. The journey began with the first audit in 1986, focusing on how well different government departments and programs were doing. The goal is to see if these programs are using public funds in the best way possible, are fair to everyone, and are achieving what they set out to do. The Auditor-General doesn't just look at the numbers; they also look at the bigger picture to ensure that government actions are effective and make a positive difference in people’s lives. This kind of oversight helps make the government more open and builds trust, leading to better services and improvements in how things are run.

Why Performance Audits Matter: The Case of South Africa’s Abandoned Mines

Performance audits are key tools for checking how well government departments are doing their jobs and making sure they improve over time. For example, South Africa's Auditor-General, Tsakani Maluleke, pointed out a big problem with the country’s abandoned mines. These old mines are dangerous, causing health and safety risks for nearby people and harming the environment.

Despite some efforts to fix these mines since 2009, progress has been slow. The recent report from the Auditor-General stressed that the Department of Mineral Resources and Energy needs to speed up its work to make these areas safe again. This shows how performance audits push for faster and better changes in government actions, aiming to make life safer and the environment cleaner for everyone.

How Do Performance Audits Work?

To understand how performance audits work, it's essential to break down the process into clear, manageable steps. Here’s how these audits typically unfold:

1. Planning Phase: This initial stage involves defining the audit objectives, scope, and methodology. Auditors will determine what aspects of the organization's performance need to be evaluated and how they will go about this process.

2. Data Collection: Auditors gather evidence to evaluate performance. This might include interviews with staff, analysis of relevant documents, observation of operations, and any other method that helps them gain a comprehensive understanding of how the organization functions.

3. Analysis: The collected data is analyzed to identify whether the organization is meeting its goals. Auditors look for gaps, inefficiencies, and areas where performance could be enhanced.

4. Reporting: The findings from the audit are compiled into a report that details what the auditors found and why it matters. This report will include recommendations for improvement based on the data analyzed.

5. Follow-Up: Often, performance audits are followed by a later review to see if the organization has implemented the recommended changes and how those changes are working.

Real-World Benefits of Performance Audits

Here are a few examples of how performance audits can lead to tangible benefits in various sectors:

• Government Sector: In a municipal department, a performance audit might reveal ways to reduce costs while maintaining service levels by identifying and eliminating inefficient use of resources.

• Healthcare: For a hospital, performance audits could highlight areas where patient care could be improved or where administrative processes can be streamlined to enhance overall operational efficiency.

• Education: In schools or universities, these audits might focus on how effectively educational programs are meeting their objectives and suggest ways to improve student outcomes.

Performance audits vs other types of engagements

The terms "Performance Audit," "Consulting Engagement," and "Agreed-Upon Procedures (Attestation Engagement)" refer to different types of engagements that accountants and auditors may undertake. Each has a specific purpose and methodology. Understanding these can help business accountants determine the best approach for evaluating and improving organizational performance.

Performance Audit

A Performance Audit is an independent assessment aimed at evaluating the efficiency, effectiveness, and economy of an organization's operations. Here is what makes performance audits essential:

• Objective Evaluation: It focuses on determining whether the organization is achieving its objectives in a resource-efficient manner.

• Scope: This can include a review of organizational activities, programs, operations, or functions.

• Outcome: The goal is to provide recommendations for improving operations and enhancing the use of organizational resources.

• Example: A performance audit might examine a municipality's building permit process to determine if it is being done efficiently and effectively, and then recommend ways to streamline the process.

Example of Performance Audit

Scenario: A municipal government wants to assess the efficiency of its public transportation system due to complaints about bus delays and overcrowding.

Application: A performance audit would be conducted to evaluate the efficiency, effectiveness, and economy of the transportation service. Auditors would review scheduling algorithms, maintenance logs, staffing levels, and rider feedback. They would also assess compliance with relevant regulations and safety standards.

Outcome: The audit might reveal that buses are not adequately maintained, causing frequent breakdowns and delays. Recommendations could include increasing maintenance staff, improving parts inventory management, or revising schedules to optimize route efficiency. These insights help the municipality improve service quality and rider satisfaction, thereby enhancing public accountability.

Consulting Engagement

A Consulting Engagement is typically more flexible than an audit and is designed to assist the management in improving the organization's operations. Here’s what characterizes a consulting engagement:

• Advisory Nature: Unlike audits that have a predefined scope and outcome, consulting engagements are more advisory in nature and can vary significantly based on what the client needs.

• Collaborative Approach: These engagements involve working closely with the client to identify areas of concern and develop strategies to address them.

• Output: The result is usually a report or a set of recommendations tailored to the client's specific needs.

• Example: A consulting engagement might involve working with a non-profit organization to develop a new strategy for donor engagement and fundraising.

Example of Consulting Engagement

Scenario: A non-profit organization wants to increase its fundraising capabilities but isn't sure how to approach potential donors or structure its fundraising campaigns.

Application: In a consulting services engagement, a consultant would work collaboratively with the organization to identify challenges and opportunities in its current fundraising strategy. The consultant might analyze past campaigns, donor data, and market trends to formulate new fundraising strategies.

Outcome: The consultant provides recommendations such as adopting new fundraising platforms, targeting different donor segments, and creating more engaging marketing materials. These suggestions are tailored to the organization’s specific context and goals, aiming to maximize fundraising effectiveness.

Agreed-Upon Procedures (Attestation Engagement)

Agreed-Upon Procedures (AUP) engagements are a type of attestation engagement where the auditor performs specific procedures that have been agreed upon by the auditor and the client. The key aspects include:

• Defined Procedures: The procedures to be followed are agreed upon by the auditor and the client (and possibly other specified parties) before the engagement begins.

• No Opinion Provided: Unlike traditional audits, the auditor does not provide an opinion. Instead, they report on the factual findings of the agreed-upon procedures.

• Flexibility: These engagements can be customized to fit specific aspects of the organization’s operations, depending on what the stakeholders are interested in.

• Example: An AUP might involve verifying the accuracy of an organization's inventory records by physically inspecting the inventory and comparing it to the organization’s records.

Example of Agreed Upon Procedure Engagement

Scenario: A company is negotiating a merger and needs specific information about the target company's inventory valuation.

Application: An AUP engagement would be set up where the auditors are specifically asked to verify the physical existence of inventory and evaluate the accuracy of valuation methods used by the target company. The procedures to be followed would be precisely defined and agreed upon by both parties involved in the merger.

Outcome: The auditors provide a report detailing their factual findings regarding the inventory counts and valuation methods. This report helps the purchasing company make an informed decision about the merger, knowing the true value of the assets involved.

How They Compare

For South African business accountants, understanding these different engagements helps in selecting the appropriate approach based on the client’s needs and the specific issues they are facing.

• A Performance Audit is best when you need a thorough evaluation of whether certain aspects of the organization are working as intended and how they can be improved.

• A Consulting Engagement is suitable for situations where the organization is looking for expert advice to solve specific problems or improve operations without the formal structure of an audit.

• Agreed-Upon Procedures are ideal when the organization needs specific factual information about certain operations, without the need for an auditor’s opinion on the overall operations.

By choosing the right engagement type, you can provide valuable insights and support to help organizations optimize their performance and achieve their goals.

Enhancing Government Audits: Unpacking the ISSAI 3000 Performance Audit Standards

The ISSAI 3000 Performance Audit Standards, as endorsed by the International Organization of Supreme Audit Institutions (INTOSAI), represent a cornerstone in the professional practice of auditing public sector entities. These standards provide a structured approach to conducting performance audits, ensuring accountability, efficiency, and transparency across governmental and public entities.

Key Requirements of ISSAI 3000

1. Independence and Ethics: Auditors must operate independently, without being influenced by the audited entities or external pressures. This ensures the credibility of their findings and preserves the integrity of their judgments.

2. Planning and Execution: Auditors are required to meticulously plan their audits to ensure comprehensive coverage of the audit subject. This involves identifying audit objectives, selecting appropriate criteria, and determining the scope and methodology to be used.

3. Audit Risk Management: Auditors need to actively manage audit risks to avoid incomplete or incorrect findings. This includes anticipating potential challenges and preparing to address them effectively.

4. Communication: Effective communication throughout the audit process is vital. Auditors must maintain open lines of dialogue with stakeholders to gather necessary information and to clarify the audit’s scope and objectives.

5. Competence and Professional Education: Auditors must possess the necessary skills and knowledge to perform audits. This includes ongoing professional development to stay current with auditing standards and methodologies.

6. Supervision: Audit work must be properly supervised to ensure that all activities are conducted in line with the established standards and objectives. This helps maintain the quality and reliability of the audit findings.

Audit Process Overview

• Selection of Topics: Topics for audits are chosen based on their significance and audibility, aligning with the strategic goals of the Supreme Audit Institution (SAI).

• Designing the Audit: The audit is designed to be efficient, effective, and economical, with a clear focus on achieving the audit objectives.

• Conducting the Audit: This phase involves gathering sufficient and appropriate evidence to support the audit findings and conclusions.

• Reporting: Auditors must produce reports that are comprehensive, convincing, and accessible, providing valuable insights and recommendations for improvement.

• Follow-up: Auditors also follow up on audit findings to ensure that recommended improvements are implemented, thereby enhancing the effectiveness of government operations.

The ISSAI 3000 standards set a high bar for performance audits by focusing on significant areas of public interest and ensuring that audits are conducted with a high level of professionalism and integrity. By adhering to these standards, SAIs not only uphold accountability and transparency but also drive meaningful improvements in the public sector. This approach ensures that government entities not only meet their operational objectives but also serve the public interest more effectively.

How CIBA Members Can Get Involved in Performance Auditing in South Africa

Members of the Chartered Institute for Business Accountants (CIBA) in South Africa have several avenues to become involved in performance auditing, a field that plays a crucial role in enhancing public sector transparency and efficiency. Here’s how CIBA members can engage with this area:

1. Gain Relevant Qualifications and Training:

• Specialised Training: Members should consider obtaining additional certifications or training in performance auditing and public sector auditing. Courses and certifications by recognised bodies or Universities that offer specific training in government and performance auditing are beneficial.

• Continuous Professional Development (CPD): Engage in CPD programs offered by CIBA that cover performance auditing, public sector accountability, and related topics. This not only enhances knowledge but also keeps members updated on the latest auditing standards and practices.

2. Networking and Partnerships:

• Government Contacts: Build relationships with local, provincial, and national government units. Understanding the internal workings of these entities can reveal opportunities for contracted audit work.

• Auditor-General of South Africa: Stay informed about opportunities posted by the Auditor-General’s office. They often seek external auditors or consultants to assist with specific auditing projects.

• Professional Events: Attend conferences, seminars, and workshops related to public sector auditing. Networking with other professionals in these settings can lead to collaborative opportunities.

3. Work with Public Sector Entities:

• Bid on Tenders: Regularly check for tender notices from government departments for auditing services. Members can bid for these tenders as individual consultants or as part of a consulting firm.

• Consultancy Roles: Many government agencies look for external consultants to conduct performance audits. Position yourself or your firm as a specialist in this area to increase your chances of being hired.

4. Collaborate with NGOs and Civil Society:

• Partnerships with NGOs: Non-governmental organizations often conduct independent performance audits of public projects they fund or are interested in. Partnering with these organizations can be a pathway to engaging in performance audits.

• Community Projects: Volunteer to audit community projects. This builds your portfolio and demonstrates your commitment to using your skills for public good.

5. Develop Expertise in Specific Sectors:

• Sector Specialization: Gain deep knowledge in specific sectors such as healthcare, education, or public works where performance audits are common. This specialization makes you more attractive to entities that need audits in these areas.

6. Advocacy and Thought Leadership:

• Publish Articles: Write about performance auditing in public sector contexts in CIBA’s newsletters or blogs. Sharing insights positions you as a thought leader.

• Policy Input: Offer your expertise during public consultations on new auditing regulations or standards. This raises your profile and can lead to direct opportunities.

7. Internships and Mentorships:

• Seek Internships: Look for internship opportunities with the Auditor-General’s office or with public sector auditing departments.

• Mentorship Programs: Participate in mentorship programs either as a mentor or mentee where you can share or gain insights on navigating the field of performance auditing.

By taking these steps, members of the Chartered Institute for Business Accountants NPC can effectively position themselves in the field of performance auditing, contributing their expertise to enhance the effectiveness and transparency of public sector operations in South Africa.

Free Course: Improving Your Organization with Performance Auditing

Course Summary:

This free course available on YouTube will show you how performance auditing is a powerful way to check how well your organization is doing. Unlike regular audits that just look at the numbers or rules, this kind of auditing digs deeper into how things are managed—from how leaders act to how teams work together and how well risks are managed. You'll learn how these audits can help find ways to do things better, making sure your organization meets its goals and keeps improving.

In this course, you'll get to understand the different types of performance audits and when it's a good idea to use them. The video explain why these audits can make a big difference in how your organization runs and give you a look at how experts at Eide Bailly approach these audits to help organisations work better and more efficiently.