Performance audits

What Is Performance Audits?

Performance audits are a type of audit that provides objective analysis and findings based on an evaluation of sufficient, appropriate evidence against defined criteria, primarily focusing on government entities and programs. Unlike traditional financial audits that concentrate on the accuracy of financial statements, performance audits delve into the operational aspects, aiming to enhance public accountability and optimize resource utilization. This falls under the broader financial category of Auditing and Accountability, crucial for ensuring that public funds are used effectively and efficiently. Performance audits evaluate how well a program or activity is achieving its objectives, focusing on what is often referred to as the "3 Es": economy, efficiency, and effectiveness.

History and Origin

The concept of government performance auditing began to take shape in the late 1960s, largely pioneered by the U.S. Government Accountability Office (GAO), which serves as the chief audit arm of the U.S. federal government.²⁸ Initially established in 1921 as the General Accounting Office, the GAO's early focus was primarily on checking the legality and adequacy of government expenditures.²⁶, ²⁷

However, as government responsibilities and programs expanded after World War II, the need for a broader evaluation of how public funds were being spent became apparent.²⁵ In 1974, Congress further broadened the GAO's evaluation role, enabling it to increasingly conduct performance audits that examined how government programs were performing and whether they were meeting their objectives.²³, ²⁴ This shift marked a significant evolution in public sector oversight, influencing similar practices in other countries under the guidance of the International Organization of Supreme Audit Institutions (INTOSAI). INTOSAI officially endorsed standards and guidelines for performance auditing in 2001, later rebranding them as the Performance Audit Standard in 2016 within its Framework of Professional Pronouncements.²²

Key Takeaways

• Performance audits evaluate government programs and operations based on economy, efficiency, and effectiveness.
• They provide objective analysis to improve program performance and enhance public accountability.
• Standards for performance audits are set by bodies like the U.S. GAO and INTOSAI.
• These audits aim to identify areas for improvement and offer actionable recommendations.
• Performance audits are distinct from financial audits, focusing on operational aspects rather than just financial accuracy.

Interpreting the Performance Audits

Interpreting performance audits involves understanding the findings and recommendations in the context of the audited program's objectives. Auditors assess whether a program is:

• Economical: Minimizing the cost of resources used while maintaining quality.²⁰, ²¹ For example, an audit might examine if a government agency procured supplies at the lowest possible cost.
• Efficient: Getting the most value from available resources, meaning the relationship between resources used and outputs produced.¹⁸, ¹⁹ An example could be evaluating if a revised process for unemployment benefits reduces processing time.
• Effective: Achieving its intended outcomes and objectives, focusing on the quality and impact of public services.¹⁶, ¹⁷ This might involve assessing if an educational program has improved student literacy levels.

The audit report provides insights into strengths, weaknesses, and opportunities for improvement.¹⁵ For example, a finding that a program is not achieving its stated goals (lack of effectiveness) might lead to recommendations for changes in program design or implementation. Similarly, identifying wasteful spending points to issues with economy or efficiency. Understanding these three "Es" is central to evaluating the success and areas for improvement within government programs.

Hypothetical Example

Consider a hypothetical performance audit of a municipal public transportation system that recently introduced a new bus route to serve a rapidly growing suburban area.

1. Objective Setting: The audit's primary objective is to evaluate the effectiveness, efficiency, and economy of the new bus route.
2. Criteria: Criteria for evaluation are established:
   • Effectiveness: Target ridership of 500 passengers per day within the first year; 90% on-time performance.
   • Efficiency: Average operational cost per passenger should not exceed $3.00.
   • Economy: Total annual operating budget for the new route not to exceed $500,000.
3. Data Collection: Auditors collect data including passenger counts, daily trip logs, fuel consumption, driver wages, maintenance records, and fare box revenue. They also interview commuters and bus drivers.
4. Analysis:
   • Effectiveness: After one year, the audit finds an average ridership of 350 passengers per day, falling short of the 500-passenger target. On-time performance is 92%.
   • Efficiency: The average operational cost per passenger is calculated at $3.50.
   • Economy: The total annual operating budget reached $550,000.
5. Findings and Recommendations: The performance audit concludes that while the route is largely on-time, it is not meeting its ridership targets, is less efficient than planned, and over budget. Recommendations might include adjusting the route schedule to better align with peak commuter times, conducting a program evaluation to understand low ridership, or exploring more fuel-efficient buses to improve resource utilization and lower costs.

This example illustrates how a performance audit can provide clear, actionable insights into a public service's operational health.

Practical Applications

Performance audits are vital tools for ensuring responsible governance and the effective delivery of public services. Their practical applications span various sectors of government and public administration:

• Government Oversight: Legislatures and oversight bodies use performance audit findings to hold public officials accountable for the use of taxpayer money.¹⁴ The U.S. Government Accountability Office (GAO) conducts thousands of such audits annually, providing critical insights to Congress.¹³
• Program Improvement: Agencies utilize audit recommendations to improve the efficiency and effectiveness of their government programs. This can lead to better service delivery, cost savings, and achievement of intended societal outcomes. For instance, an audit might recommend changes to how a disaster relief agency mobilizes resources.¹²
• Policy Development: Audit findings can inform new policy development or modifications to existing policies by highlighting gaps or unintended consequences of current approaches.¹¹
• Public Transparency: Performance audit reports contribute to transparency by making information about government operations accessible to the public and other stakeholders.¹⁰ For example, the Washington State Auditor's Office publishes detailed performance audit reports on various state functions, such as the inconsistent assessment and collection of fines related to human trafficking and sexual exploitation.⁹

Limitations and Criticisms

While performance audits are a critical component of public sector accountability, they are not without limitations and criticisms.

One significant challenge is the inherent subjectivity involved. Unlike financial reporting, where clear accounting standards exist, measuring effectiveness or efficiency in public programs can be complex and open to interpretation.⁷, ⁸ Establishing universally agreed-upon criteria and benchmarks for success can be difficult, especially for novel or highly complex government programs.⁶

Auditors may also face an "expectation gap" between what auditees expect and what the audit can deliver, as well as challenges related to poor data quality and availability.⁵ Resource utilization and time constraints can further limit the scope and depth of a performance audit.⁴ Cultural factors, such as deference to authority within government hierarchies, can also impede the audit process and the implementation of recommendations.³

Furthermore, the actual performance audit impact and the extent to which audit recommendations are implemented can depend on factors outside the auditor's direct control, such as the audited entity's willingness to learn, political will, media pressure, or changes in management.² Studies suggest that while performance audits generally have a moderate positive impact, the translation of findings into concrete improvements is not always guaranteed.¹

Performance Audits vs. Financial Audits

Performance audits and financial audits are both essential types of audits, particularly in the public sector, but they serve distinct purposes and focus on different aspects of an entity's operations.

The main area of confusion arises because both involve scrutiny and evaluation. However, a financial audit confirms what happened financially, while a performance audit questions why it happened and how well it happened, focusing on operational improvements rather than just financial veracity. An entity can have a clean financial audit but still be inefficient or ineffective in its operations, highlighting the necessity of performance audits.

FAQs

What are the "3 Es" in performance auditing?

The "3 Es" refer to economy, efficiency, and effectiveness. Economy means acquiring resources at the lowest cost. Efficiency means getting the most output from given resources. Effectiveness means achieving the desired outcomes or objectives of a program. These are the core criteria used to evaluate government operations.

Who conducts performance audits?

Performance audits are typically conducted by independent audit organizations, often within the legislative branch of government, such as the U.S. Government Accountability Office (GAO), or by Supreme Audit Institutions (SAIs) at national and sub-national levels. Internal audit functions within larger government agencies may also perform performance audits, focusing on internal risk management and internal control.

Are performance audits mandatory?

For government entities, performance audits are often mandated by law or policy, particularly for programs receiving public funds. This ensures accountability and provides oversight to legislative bodies and the public. The specific requirements can vary significantly by jurisdiction and type of entity.