Performance Auditing of Budgetary Reform

Ram Babu Nepal
(Assistant Auditor General, Office of the
Auditor General, Kathmandu)

Introduction

Increasingly, governments all over the world are now facing the challenge of demonstrating better performance in managing available resources, resulting in various reform measures in planning and budgeting system to address critical issues of resources management. This article aims to discuss the common concerns of budgeting and auditing, and the application of performance auditing concepts in evaluating the effects of reform measures.

Objectives and Elements of Budgetary Reform

The basic elements and thrusts of budgetary reform are :-

analysis of goals and objectives;
improving the system of budget presentation;
enhancing reliability of forecasting resource requirements;
improve budgetary management and control practice;
enhance the reliability level and relevance of financial reports; and
strengthen performance reporting and measurement system.

Introduction of programme budgeting is one of the major innovations of budgetary reform. It presents the intents and objectives for which funds were requested, the cost of programmes proposed for achieving these objectives, quantitative data generated to measure achievements and works performed under each programme and establishing their linkage with national development objectives. Classification of government activities by goals and objectives, comparison of costs with outcomes, exploration of alternative means of achieving outcomes and long range planning of government programmes are the major areas of focus of programme budgeting.

Common Concerns of Budgeting and Auditing

Budgeting is an executive function whereas auditing is the function oi an independent institution. However, they share the following fundamental concerns related to efficient, effective and responsible management.

promoting accountability;
enhancing effectiveness;
identifying opportunities for economy and efficiency; and
enhancing quality of performance reporting

The following comparative statement of objectives of budgetary reform and performance auditing provides a general overview of common direction and thrusts.

Budgetary Reform	Performance Auditing
To promote managerial and financial accountability.	To provide an objective assessment of the extent to which the audited entity is currently pursuing economy, efficiency and effectiveness.
To serve the internal needs of management.	To identify major deficiencies in management and control practices.
To contribute towards more effective implementation of programmes/ projects.	To offer recommendations that could help better value-for-money from resources employed.
To act as a means of managing national economy.	To encourage improvements in the system of performance reporting.
To act as a means of managing national economy.	To provide information and propose recommendations that can lead to better internal control, safeguarding of resources and due regard to public accountability.

Audit Objective, Scope, Methodology and Criteria

Defining audit objectives clearly and precisely is a must to enhance the credibility of the SAL Audit of budgetary system deserves special significance in the context of identifying major issues and constraints of resources management and offering recommendations for improvement. In broad terms, the objective of audit of budgetary reform may be described as follows :-

"to examine and evaluate the systems designed to ensure efficiency and effectiveness of financial resources, establish efficient and effective working relationship with planning, budgeting and operational authorities, smooth communication of financial information to concerned agencies and their use in making related decisions."

This would involve determining whether :-

there is clear institutional linkage between planning and budgeting systems to promote best use of available resources;
budget proposals are based on reliable facts and figures;
budgetary disbursement to operating agencies is smooth and based on programme/project requirements;
the system of financial information and performance reporting is sufficient for making decisions regarding budgetary management;
the system, role and responsibility of financial control is clearly defined and operating properly; and
the horizontal and vertical accountability relationships between executing agencies and responsible officials are clearly spelt out and operating properly.

The scope of performance auditing of budgetary reform includes examination and evaluation of the systems and practices related to:-

translation of budgetary objectives into specific systems and processes;
co-ordination between planning and budgeting;
allocation of resources to organisation/programme/project;
budgetary management and control system;
financial management information system;
performance reporting obligations and components;
monitoring and evaluation system.

Determination of specific and general criteria is an essential pre-requisite to audit execution. Criteria are the reasonable and attainable standards of performance and control against which the adequacy of systems and practices are evaluated. It reflects a normative (that is, desirable) control model for the subject matter under review. Therefore, criteria for audit of budgetary reform should be determined by considering the expected improvements from such reform. Some common issues considered in examining and evaluating budgetary reform are as follows :-

Issue Area		Process of Verification and Key Points
1. System of ensuring realistic forecast of resource requirements for organisation/programme/project reflected in budget document.		Test of accuracy, reliability and timeliness of the system of collecting budget proposals.
2. Method of ensuring sufficiency of evidence to justify income and expenditure of past years		Audit report together with financial statement of operational level entities.
3. Mechanism of meeting information requirements of different users.	Assessment of system identifying stakeholders and users, their concerns and requirements to determine adequacy of information.
4. Method of integrating budget proposals with decision making process.	Study of interrelations between information and method of their use.
5. Method of ensuring efficient allocation of resources.	Study the system of determining budget priority.
6. Method of generating information on accomplishments.	Test of accuracy and reliability of progress reports prepared at various levels.
7. System of ensuring achievement of intended impact.	Rational appraisal of results of performance measurement.

SAIs have the primary responsibility of reporting on accountability issues, highlighting physical and financial performance, and testing compliance with regulations and system of internal control. Preparation of reports and statements of performance are the responsibility of management and audit attests the reliability of management representations. A strengthened budgeting system helps a great deal in making performance related reports reliable and the auditor attests its credibility.

Identification of performance indicators and criteria is crucial for planning performance audits, setting objectives and determining scope and methodology. Programme budgeting considers determining objectives, targets, major activities, performance reporting and monitoring system as its major ingredients. Auditors have to plan their work, taking into consideration the government's approach towards these ingredients.

Challenges and Issues

Some of the critical challenges encountered in auditing budgetary reform, which have adversely affected performance auditing of budgetary reform, are indicated below :-

Internal - These challenges have arisen mainly due to lack of adequate number of qualified manpower, consistency in policy issues, formal strategic planning process and well established methodology, and organised and integrated efforts to convince audit entities about the benefits of such performance auditing in seeking their co-operation.
External - Lack of awareness of audit entities regarding the benefits of performance auditing, and inadequate parliamentary attention are basic external challenges. Delays in furnishing financial information and unwillingness of auditee entities to provide performance reports have caused difficulties in obtaining financial information in a timely fashion to evaluate performance and thereby identify strengths and weaknesses.

Suggested Measures

The following measures are suggested for improvement in the present status of performance auditing :-

Ensure consistency in policy issues - Developing countries tend to suffer in many areas due to either instability and inconsistency in policy issues or situation of indecision. Similarly, compulsion to survive within resource constraints or over dependence on external resources has made the development process more vulnerable to frequent changes in direction and priority. This has posed challenges in programme based allocation of resources. However, the auditor has to ensure consistency in his approach towards implementing the concept of performance auditing to make meaningful contribution in public resource management.
Development of human resources and motivation - Introducing a new concept and ensuring its continuity requires development and motivation of human resources. Most countries are encountered with the challenge of underdevelopment of human resources. Administrative capability is the major issue in sustaining the application of modern concepts and technologies. Therefore, it is very essential to consider the ways and means of developing human resources and motivating them to enhance the implementation of these new concepts.
Promote dialogue between SAI and audit entities - One of the major impediments in the promotion of the concept of performance auditing is the lack of dialogue between the SAI and auditee entities. Performance auditing demands varied information on different aspects of performance and management. However, some project/issue areas selected for performance audit have to be abandoned due to lack of performance related information. This situation can be improved by promoting dialogue between the SAI and auditee entities and securing the co-operation of related institutions.
Development of methodology - Wider application of policies, programmes and concepts needs methodology that provides information on the approaches, methods and interrelations among the stages of programme implementation. The challenges in implementing performance auditing are due to lack of systematic and well-structured methodologies. Similarly, budgetary reform may be popularised by developing methodologies, illustrating its potential benefits and the common issues and lessons learned through application of resolving measures.