performAnce AudiTing - Universiti Putra Malaysia

Performance Auditing in the Malaysian Public
Sector: Issues and Challenges in Promoting Public
Accountability
Zaidi Mat Daud
| Department of Accounting and Finance, Faculty of Economics and Management,
Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia
| E-mail: mrzaidi@econ.upm.edu.my
Public
sectors auditing is an as
important pect in the
course of maintaining
public accountability. It is superimposed on the
accountability process for the purpose of strengthening
control systems by providing an independent assurance
over the use of public funds by the government to the
legislature (parliament). In Malaysia, this role is entrusted
to the National Audit Department (NAD) which is headed
by the Auditor General. Traditionally, public sector
auditing was concerned with the financial and compliance
auditing, which are largely aims at ensuring that financial
transactions are correctly authorised and accounted for and
in compliance with laws and regulations. Nevertheless, the
public sector reform which had occurred in the country in
the early1980s has directly influenced the development of
public sector auditing. The public (via parliament) viewed
the audit reports based on financial information alone
as an insufficient basis to ascertain the accountability of
government agencies in carrying out their programs or
activities. This has led the NAD to expand the traditional
audit functions into performance auditing.
Definitions of Performance Auditing
Numerous researchers and institutions have offered their
definitions to performance auditing. Parker (1986), as an
example, defines performance auditing as ‘an examination
designed to determine whether the organisation in question
is performing economically, efficiently and effectively in
its use of resources, operations, procedures and pursuit
of objectives’ (p.6). However, one of the definitions which
is applicable to the Malaysian context was given by the
International Organisation of Supreme Audit Institutions
(INTOSAI), an international body for government auditors
of which the NAD is one of it’s members. INTOSAI states that
performance auditing consists of three elements;
i) audit of the economy of administration activities in
ii)
accordance with sound administrative principles and
practices and management policies;
audit of the efficiency of utilisation of human,
financial and other resources, including examination
of information systems, performance measures and
monitoring arrangements and procedures followed by
audited entities for remedying identified deficiencies;
and
iii) audit of the effectiveness of performance in relation to
achievement of the objectives of the audited entity and
audit of the actual impact of activities compared with
the intended impact (INTOSAI (1992), cited in Pollitt et
al. 1999, p.12).
In view of these definitions, it is observed that performance
auditing basically concerns with the elements of economy,
Introduction
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efficiency and effectiveness of the programme implemented
at the government agencies level. For the audit of economy,
auditors are concerned with the attainment of results
with the minimum expenditure of money, manpower or
other resources. An example of a lack of economy is the
overpricing of resources acquired in the operations of the
programme. For the audit of efficiency, auditors seek to verify
whether the resources available has been utilised in most
optimal way in achieving the desired results. An oversupply
of manpower is one example of inefficiency. While in the
audit of effectiveness, auditors are concerned with the
achievement of the desired results of the programme. The
programme is said to be ineffective if it fails to achieve the
desired results.
Objectives of Performance Auditing
In Malaysia, performance auditing has two main objectives.
One of the main objectives is “to assist the legislature
in exercising effective legislative control and oversight”
(JAN, 2002, p. A-4). Cutt (1988, p.54) argues the expansion
of accountability to emphasise on the utilisation of scarce
resources requires auditors to provide ‘some additional
information on the value of outputs’. According to him the
value of output is not measured in dollar terms, rather in
terms of the degree of attainment of a set of measures of
the level and quality of service provided. Thus, to function
effectively the parliament requires report not only on the
financial affairs (that is amount of resources spent) but also
on the managerial aspect (such as how well the government
has implemented it programmes). As such performance
auditing can assist the parliament and other stakeholders
by providing useful information on the extent of efficiency
and effectiveness of the management of resources by the
agency concerned.
Other than ensuring government accountability,
performance audit can also ‘assist public sector managers
by identifying and promoting better management practices’
(JAN, 2002, p. A-4). In relation to this, performance auditing
seeks to improve the performance of government agencies
by ensuring the efficiency and the effectiveness of the
agencies’ operations. This is possible because at the end of
audit process, the Auditor General would provide advice and
recommendations in improving the systems and the control
mechanisms. Innes (1990, p. 20) argues that performance
auditing would work as a ‘deterrent effect’ in which the audit
results and the auditors’ recommendations may provide
proper perspectives to encourage government agencies to
re-examine their overall management performance.
Issues and Challenges
One of the important elements in the public sector reform in
the county is to focus on managing the results. For example,
the Ninth Malaysia Plan, in which the government commits
RM220 billions in expenditure, emphasises more on the
outcome rather than output of programmes implemented
(NAD, 2006). In view of these staggering amounts of public
funds and increasing number of public programmes there
is a need for the auditing in these areas to be reviewed.
Although the audit provisions in the Federal Constitution
and the Audit Act 1957 have been amended and there
have been substantial improvements in the operations and
administration of NAD, the overall accountability of the
Auditor General is still subject to debate.
The effectiveness of the Auditor General in conducting
performance auditing is much depends on its power
to conduct the audit. In relation to this, the appropriate
audit mandate is important because it would provide the
authority to the Auditor General to investigate all public
resources and operations and therefore, the access to all
information required. At present, the audit mandate (as
per definition of performance auditing) is similar to other
commonwealth countries such as in the UK, Australia and
New Zealand which falls short of questioning the merits
of the policy. There was argument that this audit mandate
has to be expanded to cover the effectiveness of the merits
of the policy. The expansion is essential to maximise the
benefits of performance auditing and to maintain auditors’
independence (see Broadbent and Laughlin, 2003). However,
the expansion of the audit mandate is not easy and can be
risky because it can draw auditors into political controversy
as the policy formulation is under the responsibility of
ministers.
Performance audit covers a broader scope compared to
financial audits. It requires different techniques and skills
compared to compliance and financial auditors. In view
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of this, adequacies of professional and qualified audit
personnel are important. This undoubtedly pose a huge
challenge to the NAD given its current staff strength. It
was reported that the total number of staff at the NAD in
2006 were 1, 559 personnel comprising 17% auditors, 50%
assistant auditors, 14% audit clerks and 19% support groups.
The shortage of professional auditors to some extent, can
affect the efforts of NAD to focus on performance audit.
This can be seen based on the number of reports publish
by the NAD. It was reported that performance audit was
conducted about 128 in 2005 and 143 in 2006. These
figures are significantly low compared to the number of
government agencies, ministries and departments at the
state and federal levels.
NAD is also having problem with the timeliness of the
publication of the Auditor General’s audit report. The
three to four year delay, a common practice is yet another
indication why past audit reports have had little impact
(Malaysian Business, 1981). At present, the performance
audit reports are compiled and published together
with the financial and compliance audits. As a result, the
Auditor General’s Report for the past number of years
has being fairly sizeable documents. Although there
has been a significant improvement in the timing of the
publication, the timing gap still exists. As an example, the
Auditor General’s Report for 2005 was officially tabled in
Parliament in October 2006.
The NAD independence is another issue of great concern.
Some opposition parties and non-governmental
organisations believe that NAD is still subject to limitations
such as influence from outside parties, particularly the
government. This concern is possibly based on comments
reported in local newspapers. For examples, it was
reported in the New Sunday Times (2005) that the Prime
Minister has placed the Audit Department under his care
instead of the ministers, as was the case in the past. Datuk
Seri Dr. Mahathir Mohamad requested the Auditor General
to avoid reporting certain issues for the sake of attracting
public attention and making it sensational (Berita Harian,
2002). Additionally, as reported in the Malaysian Business
magazine, the Auditor General admitted that the ‘national
interest or policy issues are not mentioned in the report
even though the audit may have unearthed problems
there’ (quoted in Singh, 2005, p.32). These, to some extent,
show that the NAD is in a situation in which it is subject
to interference from other interested parties. Since
performance audit is concerned with the performance of
government agencies, the influence or the pressure on NAD
would be greater.
Conclusion
Performance audit is obviously important in maintaining
and safeguarding the accountability of government
agencies. Nevertheless, it seems that performance auditing
practice in Malaysia is suffering some weaknesses which
need to be addressed to ensure its effectiveness. An effective
auditing system would ensure that public accountability
arrangements are always in the right place.
References
• Cutt, J. (1988). Comprehensive Auditing in Canada: Theory
and Practice, New York: Praeger.
• Innes, J. (1990). External management auditing of
companies: A survey of bankers, Accounting, Auditing &
Accountability Journal, 3(1), 18-37
• JAN (2002). Garis Panduan Pengauditan Prestasi, Kuala
Lumpur: Jabatan Audit Negara Malaysia.
• NAD (2006). Laporan Hari Audit Se Malaysia 2006, Kuala
Lumpur: National Audit Department.
• Parker, L.D., (1986). Value for Money Auditing: Conceptual
Development and Operational Issues, Auditing Discussion
Paper No. 1., Melbourne, Australian Research Foundation.
• Pollitt, C., Girre, X., Lonsdale, J., Mul, R., Summa, H. and
Waerness, M. (1999). Performance or Compliance
Performance Audit and Public Management Reform in Five
Countries, Oxford: Oxford University Press.
Note: Complete references can be obtained from the author.
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