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Some Thoughts on Audit of Economic Policy and Performance

Ram Babu Nepal
(Director - Office of the Auditor General, Nepal.)

Auditing the Economic Policy is no mean task. Many difficult issues arise for consideration. Policies, operational procedures, projects, programmes and performance attract audit attention because it should be responsive to the changes in the administrative environs. Recent changes in audit methodologies in Nepal are traceable to an increasing awareness of its crucial role in public administration.

Economic Policy: Concept and Scope

Policy formulation is one of the vital tasks of any government as it directs public resources towards meeting broad national objectives. Economic policy refers to aims and strategies which are mainly directed towards improving economic health of a country. Monetary and fiscal policies aid that process. In a micro perspective, economic policy focuses on possible means to strengthen the financial status of concerned organizations and from the macro level approach, it is related to overall improvement in national economy. Economic policy plays a significant role in the process of socio-economic development by influencing almost all public activities and by providing reliable bases for evaluation of operational results.

Economic policy is critical to advancement in developing countries and is not limited to intervention and regulatory measures, as in the case of many developed countries. The government have to take the lead for promoting and regulating economic activities, in developing countries. Allocation of scarce resources is, therefore, serious business. His Majesty's Government of Nepal has accepted economic reform as its main obligation and had identified major areas for concentration of efforts. This has been elaborated in the recently issued "White Paper", after the restoration of multiparty democratic system in the country.

In Nepal, the identified essential elements for achieving the economic reform are:

Create appropriate economic climate by correcting the present self-conflicting economic policies and provide new direction for development planning and programming.

• Reduce the burden on national economy.
• Improve government's financial position.
• Reduce the economic burden of people.

"The economic objectives of the state are to provide the collective goods and services that correspond to the performance of its traditional functions and at the same time to promote growth and development, stability, equitable distribution of income and wealth and national independ­ence or self-reliance", as succinctly stated by Richard Goode (1986) (Richard Goode - Government Finance in Developing Countries, Tata McGraw Hill Publishing Co. Ltd., 1986 pp. 2). Although policy measures adopted for development may differ from country to country, depending upon their political ideologies and systems, they are strongly guided by the objectives of achieving self-reliance or economic independence. Governments in developing countries should not rest content merely by formulating attractive plans and policies but should also engage in some critical areas of investment, long gestation peri­ods and uncertain return, not­withstanding.

The major elements of development policy of developing countries which are to be supported by sound economic policy have been listed by Jan Tinbergen (1966) (Jan Tinbergen - The Design of Development, The E D I of the World Bank, 1966 pp3

• To create the general conditions favourable to development;
• To acquaint the government it­self, the business community and the public generally with the po­tentialities and advantages of development;
• To make a number of invest­ments, usually of the "basic" type;
• To take measures designed to fa­cilitate and to stimulate private activity and investment.

Equitable distribution of eco­nomic gain on the basis of social justice, prevention of economic exploitation and promotion of national, private and public enterprises are the aspirations that provide the motive force for the four identified essential elements.

Relevance of Economic Policy Auditing

Audit should be developed as a reliable and relevant tool for ensuring the evaluation of efficiency, economy and effectiveness in the mobilization of available resources and accountability relationship.

Audit examines both financial and management controls including information systems, reporting practices and recommends improvements where appropriated (Comprehensive Auditing: Concepts, Components and Characteristics CCAF, pp.8 c). Simplistic procedural approaches are inadequate to cover this extended scope.

Accountability applies to all strata of administration leading to the central executive's accountability to the people through legislature. Most of the government policies have to get through the process of obtaining approval on it from appropriate authority and translating them into tangible output or services to society and secure benefits. Audit should look into whether policy was formulated in accordance with the prescribed norms and practices of administrative discipline and ordinary prudence. Policy outcomes and the implementation process should be evaluated for economy and efficiency and for recognising initial weaknesses in, say, identifying policy objectives, perceiving their relevance, identifying responsibility centres, delegating authority, coordination, and in defining performance indicators. The objective of economic system of a country is to obtain self-reliance or economic independence. Therefore, audit should develop its strategies, focussing attention on those points.

Although various audit entities express the view, "the auditor should not question policy-that is the responsibility of elected representatives and the legislature", it is prudent to look into policy and related issues for conducting performance audit in a better way. Preven­tive measures against mistakes, misdeeds and inefficiencies can be also instituted.

To elaborate:

Audit of economic policy (micro or macro) helps in perceiving the real intent and in gaining meaningful evaluation.

Prevention is better than cure. Study of policy objectives and proposed courses of action helps in assessing the results and appropriateness of the steps.

Policy is a measure of bridging the gap between overall objectives of national development and specific programmes or projects. Auditing the stages of implementation aids the achievement.

Audit of economic policy measures the reasonableness and relevance of economic activities of the auditee. Thus, it is objective - oriented.

Specific development problems can be picked up and analyzed towards policy being improved, in developing countries. Audit of economic policy and performance aids in comparing achievement rate against performance indicators. Unlike other government agen­cies, audit can evaluate the economic and efficient utilisation of resources better, by looking into the very process, with detachment.

In Nepal, audit had come across the cases where results were not adequate in comparison with the resources used. Considering the useful role of policy in getting results, this development raised awareness of concerned officials that evaluation of only output or result is not sufficient. Therefore, the audit report has secured popularity among intellec­tuals who are interested in the develop­ment of the country.

In Nepal, audit is welcomed by the intellectuals, as it created an awareness that results were not always adequate, as compared to the resources used.

Strategies and Methodologies of Audit

Audit should be careful in for­mulating strategies, as devising suitable measures of evaluation is a challenging task. A lucid grasp of the diverse goals and activities of the government is a prerequisite. Strategy is the art of planning or the skill of managing affairs and methodology, as system of working. There are various measures to accomplish

particular tasks; audit should identify best measure. It is essential to under­stand the environment of economic policy of develop practical audit criteria and evaluate it rationally.

The environment of economic policy may be depicted diagrammatically as follows:

Political system, economic and social conditions are guided by national objective. Economic objectives and policies must be in tune with that objec­tive and should be reflected in the peri­odic plans. The activities of private sector is both influenced by economic ob­jective and periodic plans whereas ac­tivities of local organizations and public bodies are mainly guided through periodic plans.

The Supreme Audit Institution (SAI) should be careful in setting audit criteria which could rationally evaluate both quantitative and qualitative effect of economic policy in national economy. The audit criteria should consider following two issues: first, the basic structure or elements of policy like process of policy formulation or policy as an approach to address a specific or general issue and second, the results of implementation or policy performance. The criteria used to evaluate policy empha­size economy, efficiency, effectiveness, productivity utility, standards, consump­tion expenditure equity and responsiveness.

Evaluation of Basic Structure of Policy

Evaluation of economic policy calls for analysing sensititive and con­flicting aspects, in perspective. Generally, it may be based on following three criteria.

1. Cost-effectiveness Evalu­ation:- Determining whether program variables work towards maximising the result.
2. Process Evaluation:- Periodic assessment of program functioning to detect variations from goals, plans and procedures. Often, it involves auditing the integrity of the program's financial transactions, accounting system, and the accuracy of records.
3. Impact Evaluation - Accessing the effects of policies, and more specifically, the extent to which a policy has achieved its stipulated objectives.

Economic policy has to be evaluated on the basis of development objectives and priorities.

In auditing policies, auditors may without challenging the merits of policy objectives, draw attention to, and if necessary report publicly on, any critical lack of clarity of such objectives and in associated lower level objectives or targets. In this context the audit should generally examine whether:

1. policy statement clearly specifies how it relates to organizational development objectives,
2. policy objectives have been determined, and policy decisions, taken by appropriate authority,
3. the policy objectives were set and decisions based on sufficient, relevant and reliable financial or other data,
4. satisfactory arrangements are made after considering alternative options, including the identification, selection and evaluation of such options (but generally the auditor would not attempt to establish and evaluate further possibilities),
5. policy statement identifies responsibilities of different level of organizations in implementing different components of policy,
6. policy statement identifies associated measures to execute set policies,
7. policy statement explains criteria through which its performance should be judged,
8. established policy objectives and critical underlying assumptions have been clearly set out,
9. subsequent decisions on the implementation of policy are consistent with approved policy objectives, and have been taken with appropriate authority at the appropriate level,
10. relevant instructions to staff coincide with the approved policy objectives and decisions are closely understood by those con­cerned,
11. there is conflict or potential conflict between the means chosen to implement them,
12. policy aims and objectives are effectively translated into operational targets and measure of performance,
13. the costs of alternative level of service have been considered, and reviewed as costs change.

Evaluation of Performance

Evaluation of macroeconomic performance should consider internal changes and external factors and make cross - country comparisions. In recent years, prosperity of a country is meas­ured by the combination of social and economic indicators which give em­phasis to distribution efficiency and social equity and justice. Evaluation carried out on following basis is expected to provide reliable information on these issues.

(1)    Quantitative Measures - Accurate, timely, and meaningful in­formation on aggregate economic performance is essential for the assessment of a country's credit-worthiness by international commercial lenders and for the appropriate allocation of resources by multilateral lending institutions. "Quantitative indicators have their uses, but they should be employed with caution, as part of a broader assessment involving quantitative judgements (Donald Donovan - Measuring Macroeconomic Performance, Finance and Development, June 1983,) . Officially published statistics do not cover many of the economic transactions and can distort the record and greatly reduce their usefulness. The actual position of inflation, import and export may be different from the official statistics. The effect of "underground economy" are not recorded properly and accurately. This poses a problem. The second problem is related to establishment and appropriate weight age system for aggregating data. Audit should carefully examine the credibility and relevance of statistics related to performance, which is considered as an important aspect of effectiveness evaluation.

(2)    Sectoral Performance - Economic policy affects different sectors of economy. Sectoral programs are set to achieve broader national objectives. Resource allocation is done through annual budget considering best to sectoral policy adopted for that particular fiscal year. Evaluation of sectoral (agriculture, industry, trans­port education, health etc.) performance will be a pointer whether economic policies were able to identify the relative im­portance of different sectors of economy. In developing countries, many sectoral programmes are approved on the basis of availability of foreign assistance rather than on detailed evalu­ation and appraisal of the sector or programme need. In Nepal, audit has found that policies set in periodic plans do not agree with target of individual programmes. This problem had not only caused misappropriation of fi­nancial resources but also created confusion on evaluation of economic performance of gov­ernment. The auditor should examine whether economic policies have been reasonably sup­ported by sectoral programmes and whether resources were allocated according to priority.

(3)    Cross-countiy Comparision - It is useful to make cross country comparision. International lenders require some comparative assessment of performance in different countries. The auditor should also keep in mind that evaluation of economic performance of a country should be judged in the light of neighboring countries's performance. Some of the developing countries have not been effective in bringing about improvement in economic health of their countries despite heavy investment of resources. In analyzing its results or reason, it was observed that there were some internal and external reasons responsible for lower economic performance. Most of the internal problems are to be addressed through national initiatives with greater commitment and responsibility. Improving administrative competence, identifying real socio-economic requirements, problems and reducing the un­wanted interference of politics in social activities are some of the main points to be considered in national level. The auditor should also enquire into reasons of lower performance and examine the effectiveness of applied measures.

Issues for Consideration

Government audit is an important service to people, it should always give highest priority to its responsibility towards people. Governments generally tend to formulate attractive plans and policies but in execution, they lack administrative competence, coordination among different organizations and understanding their real intent. There­fore, it is very essential for the Supreme Audit Institutions (SAIs) to develop its organization and working procedures in such a way that its analysis on performance of government could be considered reliable and relevant for which data related to economic performance (quantitative and sectoral) can be collected systematically .and analysed for the evaluation of development projects which influences the economic policy to ensure that necessary elements were duly considered during formulation of development project proposal. Criteria of evaluation should be reasonable and monitoring process should be consistent and effective.

SAIs should consider developing appropriate audit guidelines for evaluation of policy and performance and should familiarize audit entities about relevance and importance of audit of policies and performance to improve managerial skill and should include this issue in the curriculum developed to train auditors.

Conclusion

Most of the developing countries are facing the challenges relating to iden­tification and installation of appropriate measures to bridge gap between policy and performance. SAI, as a national organization responsible to look into financial operation of government, should be competent in providing reli­able information on results of performance (effect on national economy and organizational objectives) to meet its social responsibility.