A financial audit focuses on determining whether an entity’s financial information is presented in accordance with the applicable financial reporting and regulatory framework. The primary question that it addresses is, do the audited statements or reports accurately portray the financial condition and activities of the audited entity? These audits identify whether the financial information is free from material mistakes that may have occurred as a result of fraud or error. Without such audits, a clear understanding of what the government does with public resources is hard to come by because consistent documents with this information would not otherwise be published.

Because of the high technicality of financial audits, citizen engagement may be difficult to enhance in the process itself, but it can be promoted in the follow-up stage. Many CSOs use budget information to advocate for government transparency and to fight corruption. Broad information on how state agencies execute their budget may enable CSOs to devise strategies to hold public officials accountable. Also, those state agencies may summarize budget information and translate it into easily understandable formats so that other stakeholders can build upon that data for advocacy, especially when public resources are aimed at ensuring service delivery and other interventions concerning citizen welfare.

A compliance, legality, or regularity audit assesses whether activities, financial transactions, and information are in compliance with the authorities that govern the audited entity (including rules, laws and regulations, budgetary resolutions, policy, or the general principles governing sound public sector financial management and the conduct of public officials). The primary question that it examines is, did the audited entity comply with applicable laws and regulations? Without such audits, one would not know, for example, whether budgeted resources were spent on the items approved by the legislature.

ISSAI number 400 on Fundamental Principles of Compliance Auditing states the following:

Compliance auditing promotes transparency ...

...by providing reliable reports as to whether funds have been administered, management exercised and citizens’ rights to due process honoured as required by the applicable authorities.

Compliance auditing promotes accountability...

...by reporting deviations from and violations of authorities, so that corrective action may be taken and those accountable may be held responsible for their actions.

Compliance auditing promotes good governance...

...both by identifying weaknesses and deviations from laws and regulations and by assessing propriety where there are insufficient or inadequate laws and regulations.

Given that many CSOs use budget information as a key tool to influence policy decisions, compliance audits provide a valuable entry point for citizen engagement. CSOs can use audit reports to address deficiencies in budget information and possible mismanagement. Important to note is that many compliance audits are triggered by CSOs or citizens who file complaints when protocols and laws are not followed, thereby fostering engagement in the planning of audit exercises.

A value for money (VFM), management, or performance audit focuses on whether interventions, programs, and institutions are performing in accordance with the principles of economy, efficiency, and effectiveness. The primary question that it investigates is, did the audited entity use its resources and accomplish its objectives in the most effective and efficient way? VFM audits analyze performance against suitable criteria, and the causes leading to deviations from those criteria or other problems are examined to see whether improvement is possible. These audits are critical to ensuring that the budget implementation process follows policy goals to the greatest extent possible.

In many Western developed democracies (for example, the United States), the number of VFM audits seem to be increasing compared with financial and compliance audits, and a few developing countries have also started to create space for more annual VFM audits. Some people believe that SAIs should focus on financial audits because SAIs’ primary legal mandate lies in addressing and strengthening internal financial control to eventually ensure effective performance. Evidence suggests, however, that VFM audits can contribute to increasing interest in SAI work because those reports are much easier to understand by parliamentarians, the media, and the general public. In that sense, a diverse audience can be an ally to the SAI in the demand for government accountability. Similarly, fairly pragmatic approaches can be used to assess performance issues, whereas financial and compliance audits often require a higher level of technical knowledge, which the SAI may not possess.

The progressive shift toward performance auditing

Over the past few years, SAIs in developing countries have begun to move from financial or compliance audits to VFM audits as a way to improve and strengthen transparency and accountability in PFM systems. In addition, most SAIs have implemented a risk-based approach when testing areas of potential mismanagement within the internal control system, especially as the number of transactions increased and widened the scope of audit work.

• In India, the Comptroller and Auditor General has emphasized performance audits over financial ones, strengthening the link between accountability and effective service delivery. That preference was reinforced by a significant reduction in the time taken for audits (from years to months) and the publishing of reports, which has contributed to bringing SAI work to the public light and getting wide media coverage, thereby increasing audit effectiveness and corrective actions.

  Mukesh Jagota, “Goodbye Vinod Rai, The CAG’s Attack Dog.” The Wall Street Journal—India Realtime. May 22, 2013.

• In the United States, performance audits have been conducted since the mid-1960s, but not until 2004 did the Government Accountability Office (GAO; formerly the General Accounting Office) acquire additional duties related to program evaluations and policy analysis so that it could assess whether federal interventions target social needs and meet their objectives in terms of efficiency, economy, and effectiveness. Today, VFM audits make up more than 90 percent of GAO’s workload.

  J. Christopher Mihm, “Performance Auditing: The Experiences of the United States Government Accountability Office.” Testimony Before the Committee on Budgetary Control, European Parliament, September 2013.

  Kenneth M. Dye and Rick Stapenhurst, “Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption.” The Economic Development Institute of the World Bank, 1998.

  Phillip Herr, “Overview of GAO and its Approach to Performance Auditing,” August 2014.

• In Korea, performance audits have been conducted since 2002. Acknowledging changing audit needs and emerging challenges, the role of the SAI has undergone major reform, and the scope of control has been extended from regularity audits (financial and compliance) to VFM exercises, which now represent more than 90 percent of SAIs’ work.

  Keakook Song, “Oversight by Supreme Audit Institutions: The Korean Experience.” May 2003.

• In the United Kingdom, the National Audit Office (NAO) has commended performance audits by acknowledging the significant role they play in identifying barriers to effective public policy development and implementation. Most important, the NAO sees in VFM audits an opportunity to ensure effective service delivery to citizens, envisioning them as users, consumers, and clients and also considering their special needs. In that sense, the audit processes have taken a citizen-focused perspective, which is reflected both at the planning stage—so that topics of social interest are covered by audit exercises—and in the drafting and dissemination of reports—by encouraging informed public discussion about services through propagation of findings beyond formal accountability processes.

  Jeremy Lonsdale, “Undertaking Citizen-Focused Audit— Problems and Practices.” UK National Audit Office, 2012.

• In Canada, the Office of the Auditor General´s move toward performance audit was part of a general shift toward a new system of financial administration, which privileged economy, efficiency and social equity as an underlying goal for Public Administration. The development of VFM audits entail a move away from line-item budgeting toward program budgeting, introducing rationality, planning and advanced management techniques into the financial administration process.

  Geoff Dubrow, “The Introduction of Value-For-Money-Auditing in Canada and the Link to Broader Changes in Planning and Expenditure Management,” April 2004.