This research study covers the audit of construction activities of all kinds undertaken by governments as an integral part of national development. The need for adequate infrastructure to meet the pace of development has motivated ASOSAI member countries to invest substantial funds in public works and projects. Consequently, it is imperative that the SAI of each country commit the necessary resources for the audit of public works and projects in order to ensure that accountability exists at all stages of the planning, implementation, monitoring and evaluation of public works and projects.
Realising the contemporary importance of the audit of public works and projects, the Governing Board of ASOSAI at its nineteenth meeting held on 24 and 25 May 1993 in Sydney, Australia, decided to undertake the present research project. Any attempt to establish norms for the audit of public works and projects would be a futile exercise, bearing in mind the differences in the organisation and structure of governments, political systems, audit mandates, geographical constraints and the resources available. Accordingly, this research project was undertaken with a view to studying the institutional framework for undertaking public works and projects in ASOSAI member countries and the prevailing auditing practices. Relevant aspects such as project approval, financing and accounting systems and project implementation were examined, along with the scope, objective, organisation and methodology of the external audit function conducted by the SAI.
Governments of ASOSAI member countries have laid down investment criteria in view of the high costs of public works and projects. Such investment criteria is formulated based on socioeconomic priorities of the government. In China, the central government is the main investor for projects which involve several regions and affect the national economy and the people's livelihood. For other projects, responsibility is decided according to the principle of "who benefits invests". However, local projects for energy, transport, post and telecommunications and urban public facilities are mainly funded by the local governments concerned. In India, only projects with an economic/ internal rate of return in excess of 12 per cent are likely to be authorised.
Good planning is most of the time synonymous with good implementation. The importance placed on planning invariably increases the likelihood of ensuring the viability of a particular project. Towards this end, all ASOSAI member countries have made it a prerequisite to undertake feasibility studies, especially for projects where the capital investment is substantial. The feasibility study that is carried out encompasses financial, economic, social, technical and environmental aspects.
Levels of authorisation envisaged in the project approval process serve as management controls to ensure that adequate consideration is given before individual projects are approved. Accountability is present where responsibility can be clearly identified. However, management control should not be too stringent that it is counter productive to the extent that it restricts the smooth implementation of a project. Most ASOSAI member countries advocate more control at a higher level where major investment is involved. In Australia, projects costing over A$6 million are also subjected to prior scrutiny at a public hearing.
Public works and projects involve long-term as well as short-term planning. All undertakings of this nature are initially approved by the executive authority responsible for planning. In most countries, the long-term plans are prepared on a five-year cyclical basis. Short-term plans are shown in annual budgets which are prepared within the framework of long-term plans. These annual budgets are subject to legislative approval before funds can be spent. The sources of funds to finance the expenditure in these budgets are surpluses of government current account, domestic loans and foreign aid received as grants or loans in the form of equipment, materials, services or cash. Most government ministries and departments operate on a cash basis, whereas statutory bodies and government companies operate on an accrual basis.
In most ASOSAI member countries, the Public Works Department (or similar technical unit of the government) is solely responsible for the implementation of public works and projects. However, in some member countries, public works and projects are implemented by government ministries, government departments and public enterprises independently, with the Public Works Department sometimes acting only in an advisory capacity. In countries where there are three tiers of government - central, state and local - the respective governments are responsible for the implementation of public works and projects within their areas of responsibility. Implementation may be by a single agency or by several agencies jointly coordinated through the central government. Design and supervision are either undertaken by the Public Works Department or by private consultants appointed for that purpose. The actual construction is usually undertaken by contractors appointed through public tender.
4.2.1. Design and Bills of Quantities
Professional expertise should be exercised and careful attention given to the translation of the construction concept to its detailed design, supported by the bills of quantities involved. The accuracy and sufficiency of the information used at the design stage of project implementation minimises the possibility of cost and time over-runs. Frequent interaction between the user and the designer should be standard practice, with government supervision where necessary. In Japan, the government has established and published standards for works and project design and for the preparation of relevant bills of quantities and - through the appropriate public body - ensures that consultants and contractors comply with these standards. A similar practice is adopted in some of the other countries.
4.2.2. Tender Documents
Tender documents should be carefully prepared to ensure that no disputes arise when the contract is entered into and subsequently performed. The tender documents generally should include the notice inviting tenders, the form offender to be used along with a set of conditions, the schedule of quantities of work, list of drawings and specifications. The tender documents should also set out the manner in which work will be measured and payments made to contractors and the important conditions regarding time, variation in quantities and price, penalties for delays, labour regulations and security deposits.
4.2.3. Invitation, Evaluation and Award of Tenders
The common types of tenders are open competitive tenders, restricted tenders and negotiated tenders. Restricted tenders are confined to the limited number of contractors able to meet the requirements of a particular tender. Such tenders are classified as selective tendering, using a register of eligible contractors and prequalification tendering. Negotiated tenders are implemented in special circumstances, such as where the project is to be completed within a short time frame, where there is only one supplier or contractor who has the necessary supplies or expertise, where the technical and other parameters may not be capable of precise definition and where security projects of national importance are involved. In Jordan, representatives of the SAI participate in meetings offender committees in an advisory capacity, whereas in Cyprus they are present only as observers. Where projects are financed through foreign aid, the tender procedures as required by the donors should be complied with.
All ASOSAI member countries carry out separate technical and price evaluations, except for Japan where tenderers are requested to submit only price proposals. In India, the two-stage system is also sometimes practised, where the technical bids are invited first and then price bids from technically acceptable tenderers, with the contract being awarded to the most financially and technically acceptable tender. In some cases, the single stage two-envelope system is followed, where the bids are submitted at the same time, i.e. the technical and price bids in separate envelopes. The price bids are opened and evaluated only when the corresponding technical bids are acceptable. Strict confidentiality should be observed throughout the tendering process.
4.2.4. Supervision
The authority to supervise construction by a government representative - either a government officer or an appointed consultant - should be clearly specified in the contract document, so that supervision of work is not questioned. Records of supervision in the form of site diaries, written instructions, documentation of quality tests and minutes of site meetings should be properly maintained, as evidence of actual supervision. The frequency of examining work carried out and the requirement for the superintending officer's prior approval, usually vary according to the nature of the work involved.
Quality control encompasses the whole process involved in the construction of public works and projects, i.e. planning, design, execution, supervision, monitoring, operation and maintenance. Gathering sufficient and accurate information, undertaking feasibility studies, considering alternatives and past experiences are characteristics of good quality control at the planning stage. The designers should ensure that the views of the users at all levels are given adequate importance. Supervision on the part of government representatives does not absolve the contractor of the responsibility of ensuring that quality control prevails throughout the construction phase in the materials used as well as the quality of work. Work programmes, construction schedules and critical path monitoring are effective tools that should be used. Supervision by the government and contractors' representatives should always be properly documented.
An efficient and up-to-date monitoring system facilitates managerial identification of shortfalls in progress and thus enables timely corrective action. In ASOSAI member countries project monitoring is done by the implementing agency in addition to the central agency responsible for planning and monitoring.
Procurement practices vary among ASOSAI member countries. For example, in Indonesia, most private contractors do not own their construction machinery and equipment but the Department of Public Works does own such construction resources. In Malaysia, it is common practice for machinery and equipment to be included as a separate item where public works and projects are undertaken by contract. Where equipment is procured and supplied by government, the auditors are required to ascertain whether the equipment has been procured at the most competitive rates and also whether various types of equipment are procured in quantities which are necessary as well as mutually compatible. Utilisation of equipment, fuel consumption and fixation of rates for recovery of user charges from the contractors are also looked into by audit. In Japan, contractors for the construction of public works and projects lease the necessary machinery and equipment. The leasing costs, however, are carefully checked to ensure that the machinery and equipment have been used for the particular contract involved.
As in the case of machinery and equipment, the procurement of construction materials varies among ASOSAI member countries. As an example in Indonesia, the Department of Public Works supplies both raw construction materials (such as water, sand, stones and gravel) and finished construction materials (such as cement, bricks, wood, iron and asphalt). Audit of the procurement of materials involves examination or assessment of requirements, placement of purchase orders, storage, consumption, utilisation and cost recovery from the contractors. In Malaysia, the procurement of construction materials such as cement, steel, fuel and oil subject to frequent price fluctuations is covered by a price variation clause in the contract. Contractors are also paid 75% of the cost of materials on site in their progress payments. In China and Japan, construction materials are also procured by the contractors themselves.
Government management and control of public works implementation are exercised at the planning stage through long-term development plans and annual budgets. At the implementation stage, the laws, regulations and procedures require implementing agencies to obtain prior approval from prescribed agencies at various stages. The implementing agencies are also required to submit the reports of the financial and physical progress of the projects. Delegation of authority is complemented with accountability through reporting and evaluation.
Proper operation and maintenance would increase not only the efficiency but also the life of the assets. The operation and maintenance of public projects are normally the responsibility of the various ministries, departments or public enterprises responsible for that particular government activity. Public projects can be classified into profit-earning projects such as the supply of water and power, railways and port services, nonprofit-earning projects such as libraries, schools and health services. In the case of profit-earning public projects, the pricing policies are decided after taking into consideration the capital invested, the period of expected cost recovery, the operation and maintenance charges and profit element, if any. In the case of nonprofit-earning public projects, utilisation fees are only nominal.
With ever-increasing expenditure demands on the public sector, some governments have resorted to privatisation to lessen their financial burden. There are various types of privatisation including build, operate and transfer (BOT); build, own and operate (BOO); build, operate, lease and transfer (BOLT) and trade-offs. During negotiations for privatisation, particular attention should be given to the terms and conditions relating to risk sharing, pricing, sale, accountability and monitoring. To quote from the World Development Report 1994 "Infrastructure for Development":
"In the move from a Government monopoly to a more competitive system, enforceable contracts are required to balance the interests of various parties in specific projects and to provide the stability needed in long-term investment. Also required are comprehensive, transparent and nondiscriminatory rules of the game.............. Regulation itself is imperfect because the 'right' regulatory mechanisms are not always evident. It is also imperfect because effective implementation of economic regulation requires an information base and sophistication that are rarely (if ever) attainable. Regulators are therefore vulnerable to manipulation."
Since the inception of its privatisation policy in 1985, the Malaysian government has privatised many public works and projects. In India, the private sector is making a major entry in the power sector. The governments of Cyprus and Sri Lanka have no privatisation programmes, so far.
Where projects are partially or wholly funded by foreign agencies, a stringent project clearance process is necessary with these agencies conducting their own appraisals before agreeing to supply the required finance. The funding agencies also insist on the adoption of their own tendering procedures and impose restrictions on materials and other procurement. Monitoring is done through review missions at periodic intervals and the submission of progress reports and audited annual statements. Most ASOSAI member countries receive foreign aid for the construction of public works and projects. In the case of Japan, which provides assistance to other countries, internal aid agencies such as,the Japan International Cooperation Agency and the Overseas Cooperation Fund are audited by the SAI and audit teams also visit work sites, where necessary, in countries benefiting from Japanese aid.
The public sector audit mandate of the SAI in ASOSAI member countries originates in either a national constitution or a legislative statute, or both. The audit mandate should be supported by appropriate regulatory authority to ensure effective audits and safeguard the independence of auditors. Accordingly, the rights and powers of auditors in accessing information, requesting explanations, copying documents and reporting should be specified. The rights and powers of auditors may be far-reaching, as in China should the SAI finds serious irregularities, it is empowered to suspend payments from bank accounts, close accounts, seal financial records, confiscate properties and levy fines in accordance with relevant laws. In Japan, the mandate of the Board of Audit extends to matters of loss indemnification and disciplinary action.
The audit objectives of public works and projects are to ascertain whether
11.1. Auditors engaged in the audit of public works and projects should ensure that the following areas are included in the scope of their audits:
A special feature of audit of public works and projects arises out of the highly technical and specialised nature of auditees subjects. SAIs have different approaches to audit of designs, estimates and completed works. Generally speaking, SAIs do not conduct an audit of designs qua designs, though design inadequacies causing premature failure of projects or avoidable extra expenditure do attract audit comment. SAI Australia through the engagement of specialised expertise may assess the cost effectiveness of design solutions and efficacy of design features in meeting the specialisations and requirements of the projects. SAI Brunei Darussalam, which has one civil engineer and one surveyor in its Technical Unit undertakes the audit of architectural and building design, road pavement design, concrete and bitumen mix design and concrete test procedures, but SAI audit does not extend to such specialised areas as structural design, formulation/geotechnical design and hydraulic water and structure design, which require the input of specialists or experts in these areas.
The State Comptroller's Office in Israel has recently endeavoured, with the aid of external consultants, to compare various planning and construction solutions to bridge engineering problems. The intention is not to set up alternative solutions but to examine the decision-making process, including the examination of alternatives and determine whether the preferred solution is reasonable from the viewpoint of efficiency, economy and effectiveness. The Board of Audit, Japan examines public structure design mainly from the viewpoints of economy and safety. The Auditor-General of Malaysia examines, inter alia whether information on specific needs of users was gathered for design purposes and whether alternative designs and cost implications were analysed and considered. The scope of audit by SAI China includes examination of the qualifications of units in charge of design as well as preliminary designs and construction drawings. In Iraq, designs of the various project features by the consultants are subject to audit in order to ascertain their suitability for the purposes of the project and to determine fee extent to which these designs have been incorporated in the project. In Indonesia, the audit of design and plan is aimed at ascertaining whether the work being done is supported by appropriate and accurate studies so that the work may be carried out in an economic, efficient and effective manner.
SAI's examination of estimates involves review of expenditure and analysis of cost overrun. In the audit of estimates, SAI China examines the authenticity and accuracy of construction costs and whether the preparation of estimates is in compliance with regulations. In Indonesia, audit of owner's estimates is aimed at ascertaining whether the work involved has been carried out at reasonable prices beneficial to the State. The Auditor-General of Australia assesses the performance of project management in meeting budgets and targets and examines the analysis of any department to ascertain the accuracy of the original estimates and reasons for any shortfall in planning. The scope of audit of estimates by Board of Audit, Japan includes not merely whether the estimates are properly costed but also the appropriateness of the selected construction method. In Malaysia, the audit of estimates involves the comparison of estimates with approved or standard rates of work to ascertain the accuracy of computation.
SAIs generally rely on technical examination of works by government agencies. SAI India has a system of close collaboration with the Chief Technical Examiner, who is independent of the project executing authority and whose work is also vigilance-oriented. The Auditor-General of Australia does not undertake the technical examination of works by government as an in-line function, but may review technical aspects as part of an external performance audit.
In Brunei Darussalam, the auditor should be aware of the progress of various projects through regular site visits and arrange interview with project officers on noting problem indicators, which may in appropriate circumstances be followed by detailed investigation into the quality of construction materials, workmanship, testing and inspection procedures among others. In Cyprus, on-the-spot audit or field audit encompasses quality and measurement of work besides confirmation that the work certified for payment corresponds to the work actually done by the contractor. In Japan, the Board of Audit also inspects physical progress at construction sites; the construction field audit physically examines completed structures with special emphasis on checking by tape measure, transit and theodolite whether the completed structure is in accordance with the design sheet and is built on the specified location or in the correct position, checking the number and types of steel bars and concrete pilings by photographs taken during construction or by drilling cores and checking the quality of concrete, steel bars and other materials by photographs or by drilling cores where necessary.
In Iraq, audit staff are accompanied by site engineers during field visits to examine physical progress and technical features of the work implemented. In Kuwait, the State Audit Bureau engineer examines the technical reports attached to the final account prepared by the technicians who had supervised the project execution to see that the works were completed according to the required specifications. In Jordan, the engineers of the Audit Bureau not only inspect projects under construction, but also participate in the taking over of completed works and projects.
Audit procedures and methodologies vary among ASOSAI members countries according to differences in laws and regulations, geographical constraints, available resources and volume of transactions. However, most countries have adopted system-based auditing, audit sampling and computer-assisted audit techniques in the audit of public works and projects. A common problem is the increasing number of construction undertakings to be audited with the limited auditing resources available. The SAIs of both Malaysia and Brunei Darussalam have addressed this problem by adopting two audit approaches. In the first approach, contracts above a certain value are selected for comprehensive audit of the construction undertaking throughout implementation, i.e. from the planning stage to the completion stage. In the second approach, the auditor examines only those works or projects with specific problems - their cause, impact and implication. SAI India conducts audit of public works and projects sending audit teams to executing agencies at periodical intervals and also comprehensive audit of selected works and projects to ascertain whether the public works and projects are executed economically and efficiently and whether they serve the intended purpose. In contrast, the Jordanian SAI undertakes the pre-audit of all progress payments relating to contracts for public works and projects. Audit procedures and methodologies should generally include:
The culmination of the audit process is the reporting phase which summarises the evidence gathered during audit and communicates the audit opinion and related findings. It is important for the auditor to design his report in such a way that audit observations and recommendations can be understood easily by readers. Timeliness of the report is also important because delay may render the report irrelevant to the existing situation so that corrective actions are no longer practicable. The system of audit reporting is similar in most ASOSAI member countries. During the course of audit, queries are raised with the auditee and the responses are considered by the auditor. Discussions are held with senior officials of the auditee during and on completion of audit. Significant audit findings involving major instances of irregularity, impropriety, noncompliance, waste and extravagance of expenditure are detailed in the annual report of the SAI.
Audit of public works and projects invariably involves areas which are technical in nature. Decisions regarding these technical aspects not only entail quality considerations but also have cost implications. Most ASOSAI members have faced constraints in auditing technical aspects in the absence of appropriately-trained personnel in their establishments. In China, the SAI has experienced difficulty in evaluating the use of complicated technology. A limitation which is peculiar to the SAI India is the total reliance on documentary evidence to the exclusion of physical evidence from construction site inspections. Some SAIs are also experiencing a shortage of staff to audit the increasing number of public works and projects, while in Sri Lanka the absence of suitable information systems impedes the measurement by the SAI of the projected and actual benefits involved in the construction of public works and projects.
While most SAIs have increasingly come to practise value for money audit ranging over economy, efficiency and effectiveness of expenditure beyond its regularity and formality, it needs to be recognised that far greater economy of expenditure can be secured through efficient and economical design which will cut down the costs and meet the users requirements. SAIs need to develop, consistent with their mandate and resources, capabilities to examine the designs, the alternatives considered and the pre-design studies conducted. This is by no mean an easy task involving as it does a choice between the options of locating technical expertise within the SAI or contracting audit of designs to private specialised agencies or a combination of both. While the former may bristle with problems of effective staff managements capable of meeting the aspirations for advancement of engineering and technical personnel appointed, the latter raises questions of confidentiality and meticulous assurance of impartial, unbiased and independent opinions which must characterise SAI's reports for commanding credibility.
SAIs also need to give greater attention to cost recovery and charges for supply and services rendered. These are frequently determined on extra financial considerations and involve subsidy or transfer of resources between different sections of the population of the country. But when resources are scarce and subsidy transfers lead to inefficiencies and even wasteful use of services, SAIs may have to look into and comment upon the adequacy of charges for supply and services rendered. This will be in additon to SAIs examination of the system of assessment, recovery and accounting of prescribed charges as currently practised.
With the progressive withdrawal of the State from direct economic activity and the transfer of responsibility for construction and maintenance of projects hitherto undertaken by government to private sector in several countries, SAIs face another challenge. SAIs have not merely to examine the terms and conditions on which private sector is permitted into these areas but also the functioning of the regulatory mechanisms, which may have been set up by government for the overview of privately executed/ maintained projects. A question which the SAIs will increasingly face is their rights of access to the books and records of the private owners of public utilities with a view to examining the reasonableness of costs of services provided. SAIs also need to look into environmental implications of public works and projects, which may take a long time to surface.
As the economies of ASOSAI member countries continue to grow and the public become more concerned with the value for money of public works and projects, there will be increased demands for SAIs to improve audit techniques and methodologies. It is expected that the information contained in this research document will not only provide an impetus to think further of the problems but also help to build up a scenario for improved audit practices. Consistent with the objectives of ASOSAI, it is hoped that this research programme will be followed by further exchange of ideas and experiences in the fileld of audit of public works and projects through joint seminars, study tours, etc. among member SAIs. To recall the INTOSAI motto, "mutual experience benefits all".