PERFORMANCE AUDIT

STATE AUDIT OFFICE OF GEORGIA

PREFACE

“The public audit is traditi onally associated with the accounti ng re-cords and fi nancial statements. An assessment of its authenti city and legality is conducted within the fi nancial and compliance audit. How-ever, alongside fi nancial and compliance audits, the State Audit Offi ce has launched the implementati on of a qualitati vely diff erent type of audit, namely performance audit. Performance audit is focused on the assessment of real outcomes of a spending enti ty’s acti viti es and it scruti nizes the measures undertaken for the achievement of the respecti ve outcomes. This contributes to more economic, eff ecti ve, and effi cient disposal of the public resources”.

Lasha TordiaAuditor General

WHAT IS PERFORMANCE AUDIT?

As an oversight Supreme Audit Insti tuti on, the State Audit Offi ce (SAO) has consti tuti onal mandate to examine the legality of public spending, its purposefulness and eff ecti veness; hence the SAO plays an important role in the proper functi oning and transparency of the public fi nance system. For the full-scale realizati on of this role, the State Audit Offi ce has launched the implementati on of Performance Audit according to internati onal standards.

The Performance Audit aims at examining:

• What are the real results that a parti cular organizati on or program has achieved with public funds and to what extent have the set goals of the program been achieved?

• To what extent were the acti ons taken reasonable and in line with the set objecti ves? Or could the same outcome have been achieved with less?

Consequently, the Performance Audit is a strategically important tool, through which the Parliament, the public and media control and ob-tain informati on on the results of the operati ons performed by the government agencies.

This brochure aims at demonstrati ng the signifi cance and role of Per-formance Audit for promoti ng transparent and eff ecti ve management of public fi nances. The brochure describes internati onal best practi ce of external audit within the public sector as well as basic characteris-ti cs and the role of the Performance Audit in the contemporary public fi nance system.

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INTERNATIONAL PRACTICE OF

EXTERNAL AUDIT

Having in place an objecti ve and fair assessment of the economic and fi nancial management of the State is an essenti al prerequisite for the democrati c development of a country. Such oversight must be given a due weight so it can contribute to strengthening the operati on of the public sector and its accountability.

In Georgia, the State Audit Offi ce is granted organizati onal, functi onal and fi nancial independence and is accountable to the Parliament only. It supports the Parliament in its fi nancial oversight functi on by providing the legislati ve with objecti ve and professional informati on about the public fi nancial conduct. In order to perform these functi ons properly, the Supreme Audit Insti tuti on is best advised to apply modern approaches recognized by the internati onal community and to take into considerati on the current state and reforms of their own public fi nance system.

The Performance Audit, along with Financial and Compliance Audit, is one of several types of audit determined by the INTOSAI standards. These guide the development of leading audit insti tuti ons worldwide. INTOSAI (the Internati onal Organizati on of Supreme Audit Insti tuti ons) is a non-governmental, autonomous, independent organizati on with special consultati ve status with the Economic and Social Council (ECOSOC) of the United Nati ons. INTOSAI elaborates the internati onal regulatory standards on the operati on of Supreme Audit Insti tuti ons. It facilitates internati onal meeti ngs, sharing of experience and and the development of relati onships among the Supreme Audit Insti tuti ons. It aims at constant support to the development of professionalism of Supreme Audit Insti tuti ons, serving to quality improvement of the audit acti viti es. At this ti me, INTOSAI counts about 190 full members and 4 associated members.

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The State Audit Offi ce has been a member of INTOSAI since 1992. Today, it is represented in INTOSAI’s Professional Standards Committ ee, the Internal Control Standards and Compliance Audit Subcommitt ees, in the working groups on Programme Evaluati on and Environmental Auditi ng.

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PERFORMANCE AUDIT

As noted above, INTOSAI standards disti nguish three major types of audit: fi nancial, compliance and performance audit. To put it simply, fi nancial audit studies the authenti city of the fi nancial reporti ng and their conformity with accounti ng rules and standards. Compliance audit studies the legality of the implemented acti ons and their conformity with established rules and regulati ons. As for Performance Audit, it includes the assessment of operati ons from Economy, Effi ciency and Eff ecti veness perspecti ve (so-called “3 E”). The interdependence of the “3E” components is presented in the following diagram:

The implementati on of Performance Audit in the State Audit Offi ce has started in 2010. With the support of the Deutsche Gesellschaft für

Economy Efficiency

Set objective

Employed resources

(Input)

Final product/result

(output)

Effect /impact

(Outcome)

Effectiveness

Actions of the spending

objects

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Internati onale Zusammenarbeit (GIZ) and the Swedish Nati onal Audit Offi ce, the Performance Audit Methodology has been developed in line with internati onal standards. Based on this document, the Performance Audit Approach asks.

• To what extent has the principle of Economy been considered in the management, practi ce and strategy of the spending units? Economy in this case means the minimiza on of resources (input) used to undertake par cular measures, given that the cost reducti on does not aff ect the quality of the fi nal product (output). Resources include fi nancial, human and material resources. In this regard, the audit allows assessing for example how well the procurement process is organized, to what extent the procured goods and services were obtained at a reasonable price and whether they fi t the demand (both in terms of quanti ty and quality) in mind.

• How Effi cient human, fi nancial and material resources were

employed. While assessing the effi ciency, two main ques ons will be raised: 1. would it be possible to achieve the same results with less resources? - The so-called minimum principle and 2. Using similar amounts of resources (qualita vely and quan ta vely), would it be possible to achieve be er results? - The so-called maximum principle. In this regard, there is a close connecti on between the principles of economy and effi ciency, in view of the fact that they both focus on the use of resources. In additi on, based on the Effi ciency principle, it is possible to determine whether the spending unit is making opti mal use of its resources when making its services or products available (in the required quanti ty and quality). The effi ciency studies the rati o of achieved results over the resources used.

• To what extent the goals were achieved, i.e. the connecti on

between planned and actual results (principle of Eff ec veness). The Eff ec veness consists of two parts: fi rstly, whether or not

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defi ned objec ves have been achieved, and secondly whether the actual ac vi es and outputs (measures, decisions) of the implemen ng unit are related and best suited to the defi ned objec ves. In this respect, the audit allows to assess: how well and clearly a certain government program is planned and organized, how well its goals are being realized; how eff ecti ve the program management, organizati onal structure and decision-making procedures are carried out and whether all these are best suited to achieve the objecti ves. It may also look at how external factors aff ect the achievement of objecti ves and how current practi ce can be improved.Eff ecti veness).

The process of carrying out a Performance Audit consists of several stages, which are presented in the following diagram. This process takes into considerati on acti ve communicati on with the auditee in the planning and basic research stages, also providing a conclusive meeti ng to introduce the draft audit report.

Plannig

Basic research

Preparation of thereport

Further reaction

Selection of the audit themes Preliminary examination and

elaboration of the work plan

evidences

Final audit report Presentation of the audit report

Further follow-up on the recommendations of the performance Audit

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The majority of state programs and operati ons are unique in their essence and implementati on stages, since each administrati on seeks to solve a parti cular problem or achieve a parti cular purpose. Consequently, from the side of the SAO, in-depth knowledge of a variety of spheres, an analyti cal and creati ve approach to the issue, fi nding alternati ves and evaluati on skills are necessary to conduct a comprehensive Performance Audit. Someti mes, this type of audit requires integrati on of the technical approaches of the program evaluati on and diff erent analyti cal tools.

Performance Audit is an important tool to evaluate how effi cient and result-oriented taxpayers’ money is spent. The spending unit’s acti ons may be legal and the accompanying fi nancial transacti ons correctly accounted for. It may nonetheless be ineff ecti ve (in that it could not achieve the set objecti ves) or ineffi cient (i.e. bett er outcomes could have been achieved with the same fi nancial resources). Valuable, constructi ve and feasible recommendati ons issued as a result of the Performance Audit support the achievement of strategic and operati onal objecti ves and improve performance effi ciency.

The successful implementati on of Performance Audit is important in the process of developing external audit in Georgia as well as contributi ng to the on-going reforms in public fi nancial management, in parti cular results-oriented budgeti ng (program budget).

Therefore, due to the special functi on of the Performance Audit, it will support the rati onal use of public resources and improvement of the quality of public services.

June 2013

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96, Ketevan Dedofali Ave,0144 Tbilisi, Georgia Tel: (+995 32) 243 84 38 (178)Fax: (+995 32) 243 81 31www.sao.ge