STATE AUDIT OFFICE OF GEORGIA PERFORMANCE AUDIT

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5 STATE AUDIT OFFICE OF GEORGIA PERFORMANCE AUDIT

6 PREFACE The public audit is traditionally associated with the accounting records and financial statements. An assessment of its authenticity and legality is conducted within the financial and compliance audit. However, alongside financial and compliance audits, the State Audit Office has launched the implementation of a qualitatively different type of audit, namely performance audit. Performance audit is focused on the assessment of real outcomes of a spending entity s activities and it scrutinizes the measures undertaken for the achievement of the respective outcomes. This contributes to more economic, effective, and efficient disposal of the public resources. Lasha Tordia Auditor General

7 WHAT IS PERFORMANCE AUDIT? As an oversight Supreme Audit Institution, the State Audit Office (SAO) has constitutional mandate to examine the legality of public spending, its purposefulness and effectiveness; hence the SAO plays an important role in the proper functioning and transparency of the public finance system. For the full-scale realization of this role, the State Audit Office has launched the implementation of Performance Audit according to international standards. The Performance Audit aims at examining: What are the real results that a particular organization or program has achieved with public funds and to what extent have the set goals of the program been achieved? To what extent were the actions taken reasonable and in line with the set objectives? Or could the same outcome have been achieved with less? Consequently, the Performance Audit is a strategically important tool, through which the Parliament, the public and media control and obtain information on the results of the operations performed by the government agencies. This brochure aims at demonstrating the significance and role of Performance Audit for promoting transparent and effective management of public finances. The brochure describes international best practice of external audit within the public sector as well as basic characteristics and the role of the Performance Audit in the contemporary public finance system. 1

8 INTERNATIONAL PRACTICE OF EXTERNAL AUDIT Having in place an objective and fair assessment of the economic and financial management of the State is an essential prerequisite for the democratic development of a country. Such oversight must be given a due weight so it can contribute to strengthening the operation of the public sector and its accountability. In Georgia, the State Audit Office is granted organizational, functional and financial independence and is accountable to the Parliament only. It supports the Parliament in its financial oversight function by providing the legislative with objective and professional information about the public financial conduct. In order to perform these functions properly, the Supreme Audit Institution is best advised to apply modern approaches recognized by the international community and to take into consideration the current state and reforms of their own public finance system. The Performance Audit, along with Financial and Compliance Audit, is one of several types of audit determined by the INTOSAI standards. These guide the development of leading audit institutions worldwide. INTOSAI (the International Organization of Supreme Audit Institutions) is a non-governmental, autonomous, independent organization with special consultative status with the Economic and Social Council (ECOSOC) of the United Nations. INTOSAI elaborates the international regulatory standards on the operation of Supreme Audit Institutions. It facilitates international meetings, sharing of experience and and the development of relationships among the Supreme Audit Institutions. It aims at constant support to the development of professionalism of Supreme Audit Institutions, serving to quality improvement of the audit activities. At this time, INTOSAI counts about 190 full members and 4 associated members. 2

9 The State Audit Office has been a member of INTOSAI since Today, it is represented in INTOSAI s Professional Standards Committee, the Internal Control Standards and Compliance Audit Subcommittees, in the working groups on Programme Evaluation and Environmental Auditing. 3

10 PERFORMANCE AUDIT As noted above, INTOSAI standards distinguish three major types of audit: financial, compliance and performance audit. To put it simply, financial audit studies the authenticity of the financial reporting and their conformity with accounting rules and standards. Compliance audit studies the legality of the implemented actions and their conformity with established rules and regulations. As for Performance Audit, it includes the assessment of operations from Economy, Efficiency and Effectiveness perspective (so-called 3 E ). The interdependence of the 3E components is presented in the following diagram: Effectiveness Set objective Employed resources (Input) Actions of the spending objects Final product/result (output) Effect / impact (Outcome) Economy Efficiency The implementation of Performance Audit in the State Audit Office has started in With the support of the Deutsche Gesellschaft für 4

11 Internationale Zusammenarbeit (GIZ) and the Swedish National Audit Office, the Performance Audit Methodology has been developed in line with international standards. Based on this document, the Performance Audit Approach asks. To what extent has the principle of Economy been considered in the management, practice and strategy of the spending units? Economy in this case means the minimiza on of resources (input) used to undertake par cular measures, given that the cost reduction does not affect the quality of the final product (output). Resources include financial, human and material resources. In this regard, the audit allows assessing for example how well the procurement process is organized, to what extent the procured goods and services were obtained at a reasonable price and whether they fit the demand (both in terms of quantity and quality) in mind. How Efficient human, financial and material resources were employed. While assessing the efficiency, two main ques ons will be raised: 1. would it be possible to achieve the same results with less resources? - The so-called minimum principle and 2. Using similar amounts of resources (qualita vely and quan ta vely), would it be possible to achieve be er results? - The so-called maximum principle. In this regard, there is a close connection between the principles of economy and efficiency, in view of the fact that they both focus on the use of resources. In addition, based on the Efficiency principle, it is possible to determine whether the spending unit is making optimal use of its resources when making its services or products available (in the required quantity and quality). The efficiency studies the ratio of achieved results over the resources used. To what extent the goals were achieved, i.e. the connection between planned and actual results (principle of Effec veness). The Effec veness consists of two parts: firstly, whether or not 5

12 defined objec ves have been achieved, and secondly whether the actual ac vi es and outputs (measures, decisions) of the implemen ng unit are related and best suited to the defined objec ves. In this respect, the audit allows to assess: how well and clearly a certain government program is planned and organized, how well its goals are being realized; how effective the program management, organizational structure and decision-making procedures are carried out and whether all these are best suited to achieve the objectives. It may also look at how external factors affect the achievement of objectives and how current practice can be improved.effectiveness). The process of carrying out a Performance Audit consists of several stages, which are presented in the following diagram. This process takes into consideration active communication with the auditee in the planning and basic research stages, also providing a conclusive meeting to introduce the draft audit report. Plannig Basic research Preparation of the report Further reaction Selection of the audit themes Preliminary examination and elaboration of the work plan evidences Final audit report Presentation of the audit report Further follow-up on the recommendations of the performance Audit 6

13 The majority of state programs and operations are unique in their essence and implementation stages, since each administration seeks to solve a particular problem or achieve a particular purpose. Consequently, from the side of the SAO, in-depth knowledge of a variety of spheres, an analytical and creative approach to the issue, finding alternatives and evaluation skills are necessary to conduct a comprehensive Performance Audit. Sometimes, this type of audit requires integration of the technical approaches of the program evaluation and different analytical tools. Performance Audit is an important tool to evaluate how efficient and result-oriented taxpayers money is spent. The spending unit s actions may be legal and the accompanying financial transactions correctly accounted for. It may nonetheless be ineffective (in that it could not achieve the set objectives) or inefficient (i.e. better outcomes could have been achieved with the same financial resources). Valuable, constructive and feasible recommendations issued as a result of the Performance Audit support the achievement of strategic and operational objectives and improve performance efficiency. The successful implementation of Performance Audit is important in the process of developing external audit in Georgia as well as contributing to the on-going reforms in public financial management, in particular results-oriented budgeting (program budget). Therefore, due to the special function of the Performance Audit, it will support the rational use of public resources and improvement of the quality of public services. June

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