Creative Performance Audit

Performance audit has a long story in many countries to oversee the programme or activity carried out by the public agencies to manage the resource in an efficient and economical manner and the programme are carried out effectively and managed to give a positive impact to the target group. In Malaysia, performance audit has started way back since the 1990’s but the approach at that time whereby certain criteria and aspects are not complicated as compared to this day. Performance audit from time to time are also affected by the government policy and the development of the ICT. Those days, not many activities or programmes involve a huge sum of money spent and very few development projects are carried out throughout the country. Performance audit are also sometimes called value for money or VFM. In the National Audit Department (NAD), VFM is defined as how much RM1 spent by the public sector gives the best value for money in terms of quality on goods and supply rendered to the government agencies. After the independence of Malaysia, the nature of audits still revolves around the certification of financial statements and compliance on rules and regulations. With the introduction of Programme and Performance Budgeting where the estimated budget was based on activities and projects performance budgeting approached in 1968. Consequently, the auditing approach has also been affected and the need for the change of the audit approach not only concentrate on certification of financial statement and compliance audit but also cover a new approach adopted by the Auditor General’s (AG) Office.

The Performance Audit was introduced for the first time in history of Malaysia. To be in line with the government policy, the AG Office has amended the Audit Act successfully in 1978. With the introduction of three elements in the Audit Act such as extravagances, wastefulness and fraud, the audit approach has changed the mind and the way how the auditors think extremely. Now, the auditor in the NAD must be equipped with the new approach and tools to conduct the performance audit. What the NAD is concerned with is how an auditor is going to do the performance audit with the new approach besides the financial and compliance auditing that needs to be fulfilled? NAD has taken several reforms in managing the new challenges. Among the reforms was the Transformation of the NAD in 2016 with the set up of three major sectors which specialised on Financial, Performance and Governance.

Question 1: How does creative performance audit process helps auditing process?

When we talk about the audit process, we are talking about the audit procedural which involve examination, checking and assessment or evaluation on the programme or activity to determine whether the results of the activity are performed and managed efficiently, effectively and economically and achieved the objective set. ISSAI 300/35 has laid down the stages for auditor to follow:

• Planning Phase: This process involved:

o Selection of the topics

o Overview and Literature Review

o Design the audit works

o Preparation of Annual Audit Plan

o Preparation of Audit Planning Memorandum – Programme Audit on Activity/Programme

• Audit execution Phase: This process involved:

o Data gathering

o Analysis data

o Audit finding and observation

o Management letter

o Exit Conference

• Reporting Phase: This process involved:

o Drafting audit report

o Feedback from auditee

o Final Report

Selection of the topics is very important and most critical of the successful story of the audit report. At this stage the auditor are requiring to do literature review before selecting the specific and relevance topics in the programme or activity. The selection is another important aspect which the auditor must creatively think in carry out performance audit. It is very important where the auditor need to understand with full knowledge and thoroughly on the activity/programme otherwise they will not be able to successfully produced a good report. That’s is why the selection topics is important to take it seriously before go to next stage. This process is important when the literature review found issues or identify the issues that helps them to fill up the score matrix format on the selection of the topics.

At the Planning Phase the selection of the topics process requires the auditor to submit the selection topics based on the Criteria Selection of the Topics Score Matrix in the format. The total score will be most potential topic to choose and the top of the list. The criteria used in the format are as follow:

i. Management Risks

ii. Potential Impact

iii. Financial materiality

iv. Visibility

v. Significance

vi. Coverage

vii. Auditability

But ones must bear in mind that although the auditor have used the format but creativity again play and important parts of the selection topics process. The format is a guide but other criteria also not in the seven criteria should not ignore. To support the topics firmly. We have introduced a few elements to support the topics choose such as social and politic aspect. What the auditor should look into these aspect is the effect of introducing or enforce certain regulation that might affect certain peoples and does the government execute any programme or activity according to good governance and transparent. This is a new thing which NAD never before introduced in the selection of the topics. Base on the topics choose the auditor have to do overview and submit the overview report to the Auditor General for approval. This is to ensure that alongside the selection criteria with the overview report we have gain early knowledge or expectation what’s will the report be.

The next stage is to design the audit works. Previously the auditor design the audit works by using the questionnaire but again when writing report some of the issues pick up cannot link with the objective audit, criteria audit, expected audit and audit opinion/audit conclusion. So to avoid wastage of time on the audit works, the NAD have to adopt the Audit Matrix’s under ISSAI 3200 to guide and make sure auditor on the right path successfully to summarise the audit result in line with the audit objective so that they can prepare the Audit Planning Memorandum – Detail Audit Programme for detail audit works or execute the audit works.

At this APM preparation process, the auditor needs to clearly and correctly define the criteria and conclude or opinion that the subject matter meets the criteria. The best criteria when it comes from the auditee from the objective of the programme/activity. Fail to do so, it will lead to wrong judgement and conclusion. As for a guide the auditor should consider these point:

• It comes from the programme objective
• Agreed by both parties
• It is free of subjective interpretation
• It come from auditee of the authority.

Then the next phase is the execution of the audit works. Auditors will do all the processes involved in the execution phase. So as a guide as mention the above by using the audit matrix it guides and drive the auditor in the right way. So, in short, what need the auditor bear in mind during this stage is make sure audit finding includes four elements that is criteria, condition, cause and effect. The result of the audit objectives is established using these elements.

i. Criteria – The criteria include the expectation, standards, rules, procedures, policy, comparative benchmark, goals and plans of the programme and activity.

ii. Condition – What is? Is compared with what should be.

iii. Determine the cause and effects of the finding.

iv. Impact or the finding like estimate loss to the stake holders or to the citizen.

v. Develop audit conclusion and recommendation.

Sometime audit come across where the audit criteria not available or data management are bad where certain cases data not file at the auditee office. So the auditor has to creatively think the best approached to define the criteria. Sometime the auditor failed to ascertain criteria and during writing the report one of the weaknesses is the missing criteria. So the report produced incomplete or cannot conclude the audit result again the audit objective. This is where experience and expert senior officer should lead and guide the auditor at the early stages. Failure to do that most probably the issues will drop. That’s why the audit matrix sheet is important to capture all data and audit finding into the audit matrix format.

During matching criteria and condition most auditor failed because they don’t have expertise in using creativity such as what sort of technique to be used or combination of certain techniques such as cost-benefit analysis, using graph data processing, CAATS and analysis organization. In some instances, auditor failed to find criteria, they should creatively look or find other source such as laws, policy, regulations, published standard of professional association. If this resource is not available, they can use others organisation standard similar to the same scenario.

Based on the four elements the auditor should prepare the writing report. This report should communicate with the auditee for verification and comments or feedbacks. It can be in special format where inside the format into column consist of criteria, finding, cause and effect, estimation impact, conclusion and feedback. The management letter prepared for the Exit Conference and presenting the audit finding or issues so that the auditee can prepared the answer for any discrepancy and if possible take immediate necessary action on the audit recommendations. It is also to facilitate the auditee to understand the risk and weaknesses highlighted. After the Exit Conference the auditor prepare the final report before table in Parliament. What we have improve in bad writing based on bad audit finding is where we overcome by establishing a guide and checklist so that the supervisor who review the writing report will have used this guide and checklist as a schema to reject or accepted the report. This format is called Quality Assurance of Performance Auditing and Preparing the Audit Report. It guides the senior officer to check the report with the document presented.

Question 2. How do you foresee performance audit process in Malaysia?

Issues of Performance Audit in Malaysia is one of the upmost issues raised by the Auditor General in his report. In Malaysia, there are not many auditors who are doing performance audit. It is also very rare to find them in the private sector and government agencies. This is probably due to the fact that most of the auditors in the private sector focus on financial auditing, compliance and financial management auditing. Factors arising of the inefficiencies or inadequate in the audit works in most of the government entity at Federal or state level are because they don’t have sufficient/lack of staff to do the performance audit and inadequate performance audit skill training which obstruct the internal auditors to perform performance auditing. The meeting with all the internal audit of Ministries highlight the same issues of insufficient staff and skill auditor to do the auditing. In Malaysia, the National Audit Department (NAD) in public sector is the only one that carries out performance auditing. They have the training institution or training centre called the National Audit Academy to train auditors in performance audit. Most of them in the academy are NAD staffs. National Academy Audit would also receive request from external organisations that want the NAD training in performance auditing but NAD itself have constraints in terms of resources because the facilitators who train the auditors are engaged with their current work. They must allocate their time to train auditors and at the same time they have to fulfil their current responsibilities. So, the shortage of skilled and experienced trainers or speakers is another issue. In the public sector, the NAD is given the mandate in the Federal Constitution and under the Audit Act 1957 require the Auditor General Office to carry out those functions and duties. In the Auditor General Report, it extensively highlighted in his annual report about the inefficiencies of the internal audit which the Auditor General highlighted weaknesses such as improper payment, low quality of work or supplies conducted not according to the specification, unreasonable delays, weaknesses in management of assets, abandoned projects (white elephants), wastage, misappropriation of fund, extravagances, abuse of power and fraud which year in year out the same issues raised in the Auditor General Report. So far, in Ministries, the internal auditors are from the NAD seconded to the Ministries but then they can only conduct performance audit on a few topics and on programme/activity which cover the big department and branches throughout Malaysia. But again, because of shortage of staff and skill auditors, it would obstruct them to perform the auditing effectively and efficiently. What NAD covers in the Auditor General reports is a small percentage of the total population of the overall programme/activities. So, how important is the performance audit in the agency’s so that the issues raised annually by the Auditor General Report can be minimised. The most important thing in the internal audit is the 3 layers of defence in the agency. They are the ones who can help the agency to manage the programme/activities according to the objective of the agency itself. The agencies should enhance the effectiveness of internal audit, get enough and proper training and guidance so that they know how to audit according to priorities and risk areas so that they can report significant findings, recommendations and impacts. It is worth to spend money to enhance the internal audit because they are the people who highlight weaknesses that can cause catastrophes to the agency such as fraud cases, image tarnished, loss of millions etc.

By,

Datuk Juhari Bin Haron