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PERFORMANCE AUDITING IN THE MALAYSIAN PUBLICSECTOR: ISSUES AND CHALLENGES IN PROMOTING PUBLICACCOUNTABILITY

Zaidi Mat Daud|Department of Accounting and Finance, Faculty of Economics and Management,Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia|E-mail: mrzaidi@econ.upm.edu.my

Introduction

Publicsectors auditing is an as

important pect in the

course of maintaining

public accountability. It is superimposed on the

accountability process for the purpose of strengthening

control systems by providing an independent assuranceover the use of public funds by the government to the

legislature (parliament). In Malaysia, this role is entrusted

to the National Audit Department (NAD) which is headed

by the Auditor General. Traditionally, public sector

auditing was concerned with the financial and compliance

auditing, which are largely aims at ensuring that financial

transactions are correctly authorised and accounted for and

in compliance with laws and regulations. Nevertheless, the

public sector reform which had occurred in the country in

the early1980s has directly influenced the development of

public sector auditing. The public (via parliament) viewed

the audit reports based on financial information alone

as an insufficient basis to ascertain the accountability of

government agencies in carrying out their programs or

activities. This has led the NAD to expand the traditional

audit functions into performance auditing.

Definitions of Performance Auditing

Numerous researchers and institutions have offered their

definitions to performance auditing. Parker (1986), as an

example, defines performance auditing as an examination

designed to determine whether the organisation in question

is performing economically, efficiently and effectively in

its use of resources, operations, procedures and pursuit

of objectives (p.6). However, one of the definitions which

is applicable to the Malaysian context was given by theInternational Organisation of Supreme Audit Institutions

(INTOSAI), an international body for government auditors

of which the NAD is one of its members. INTOSAI states that

performance auditing consists of three elements;

audit of the economy of administration activities ini)

accordance with sound administrative principles and

practices and management policies;

audit of the efficiency of utilisation of human,ii)

financial and other resources, including examination

of information systems, performance measures and

monitoring arrangements and procedures followed by

audited entities for remedying identified deficiencies;

and

audit of the effectiveness of performance in relation toiii)

achievement of the objectives of the audited entity and

audit of the actual impact of activities compared with

the intended impact (INTOSAI (1992), cited in Pollitt et

al. 1999, p.12).

In view of these definitions, it is observed that performance

auditing basically concerns with the elements of economy,

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efficiency and effectiveness of the programme implemented

at the government agencies level. For the audit of economy,

auditors are concerned with the attainment of results

with the minimum expenditure of money, manpower or

other resources. An example of a lack of economy is the

overpricing of resources acquired in the operations of theprogramme. For the audit of efficiency, auditors seek to verify

whether the resources available has been utilised in most

optimal way in achieving the desired results. An oversupply

of manpower is one example of inefficiency. While in the

audit of effectiveness, auditors are concerned with the

achievement of the desired results of the programme. The

programme is said to be ineffective if it fails to achieve the

desired results.

Objectives of Performance Auditing

In Malaysia, performance auditing has two main objectives.

One of the main objectives is to assist the legislature

in exercising effective legislative control and oversight

(JAN, 2002, p. A-4). Cutt (1988, p.54) argues the expansion

of accountability to emphasise on the utilisation of scarce

resources requires auditors to provide some additional

information on the value of outputs. According to him the

value of output is not measured in dollar terms, rather in

terms of the degree of attainment of a set of measures of

the level and quality of service provided. Thus, to function

effectively the parliament requires report not only on the

financial affairs (that is amount of resources spent) but also

on the managerial aspect (such as how well the government

has implemented it programmes). As such performance

auditing can assist the parliament and other stakeholders

by providing useful information on the extent of efficiency

and effectiveness of the management of resources by the

agency concerned.

Other than ensuring government accountability,

performance audit can also assist public sector managers

by identifying and promoting better management practices

(JAN, 2002, p. A-4). In relation to this, performance auditing

seeks to improve the performance of government agencies

by ensuring the efficiency and the effectiveness of the

agencies operations. This is possible because at the end of

audit process, the Auditor General would provide advice and

recommendations in improving the systems and the control

mechanisms. Innes (1990, p. 20) argues that performance

auditing would work as a deterrent effect in which the audit

results and the auditors recommendations may provide

proper perspectives to encourage government agencies to

re-examine their overall management performance.

Issues and Challenges

One of the important elements in the public sector reform in

the county is to focus on managing the results. For example,

the Ninth Malaysia Plan, in which the government commits

RM220 billions in expenditure, emphasises more on the

outcome rather than output of programmes implemented

(NAD, 2006). In view of these staggering amounts of public

funds and increasing number of public programmes there

is a need for the auditing in these areas to be reviewed.

Although the audit provisions in the Federal Constitutionand the Audit Act 1957 have been amended and there

have been substantial improvements in the operations and

administration of NAD, the overall accountability of the

Auditor General is still subject to debate.

The effectiveness of the Auditor General in conducting

performance auditing is much depends on its power

to conduct the audit. In relation to this, the appropriate

audit mandate is important because it would provide the

authority to the Auditor General to investigate all public

resources and operations and therefore, the access to all

information required. At present, the audit mandate (as

per definition of performance auditing) is similar to other

commonwealth countries such as in the UK, Australia and

New Zealand which falls short of questioning the merits

of the policy. There was argument that this audit mandate

has to be expanded to cover the effectiveness of the merits

of the policy. The expansion is essential to maximise the

benefits of performance auditing and to maintain auditors

independence (see Broadbent and Laughlin, 2003). However,

the expansion of the audit mandate is not easy and can be

risky because it can draw auditors into political controversy

as the policy formulation is under the responsibility of

ministers.

Performance audit covers a broader scope compared to

financial audits. It requires different techniques and skills

compared to compliance and financial auditors. In view

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of this, adequacies of professional and qualified audit

personnel are important. This undoubtedly pose a huge

challenge to the NAD given its current staff strength. It

was reported that the total number of staff at the NAD in

2006 were 1, 559 personnel comprising 17% auditors, 50%

assistant auditors, 14% audit clerks and 19% support groups.The shortage of professional auditors to some extent, can

affect the efforts of NAD to focus on performance audit.

This can be seen based on the number of reports publish

by the NAD. It was reported that performance audit was

conducted about 128 in 2005 and 143 in 2006. These

figures are significantly low compared to the number of

government agencies, ministries and departments at the

state and federal levels.

NAD is also having problem with the timeliness of the

publication of the Auditor Generals audit report. Thethree to four year delay, a common practice is yet another

indication why past audit reports have had little impact

(Malaysian Business, 1981). At present, the performance

audit reports are compiled and published together

with the financial and compliance audits. As a result, the

Auditor Generals Report for the past number of years

has being fairly sizeable documents. Although there

has been a significant improvement in the timing of the

publication, the timing gap still exists. As an example, the

Auditor Generals Report for 2005 was officially tabled in

Parliament in October 2006.

The NAD independence is another issue of great concern.

Some opposition parties and non-governmental

organisations believe that NAD is still subject to limitations

such as influence from outside parties, particularly the

government. This concern is possibly based on comments

reported in local newspapers. For examples, it was

reported in the New Sunday Times (2005) that the Prime

Minister has placed the Audit Department under his care

instead of the ministers, as was the case in the past. Datuk

Seri Dr. Mahathir Mohamad requested the Auditor General

to avoid reporting certain issues for the sake of attracting

public attention and making it sensational (Berita Harian,

2002). Additionally, as reported in the Malaysian Business

magazine, the Auditor General admitted that the national

interest or policy issues are not mentioned in the report

even though the audit may have unearthed problems

there (quoted in Singh, 2005, p.32). These, to some extent,

show that the NAD is in a situation in which it is subject

to interference from other interested parties. Since

performance audit is concerned with the performance of

government agencies, the influence or the pressure on NAD

would be greater.

Conclusion

Performance audit is obviously important in maintaining

and safeguarding the accountability of government

agencies. Nevertheless, it seems that performance auditing

practice in Malaysia is suffering some weaknesses which

need to be addressed to ensure its effectiveness. An effective

auditing system would ensure that public accountability

arrangements are always in the right place.

References

Cutt, J. (1988). Comprehensive Auditing in Canada: Theory

and Practice, New York: Praeger.

Innes, J. (1990). External management auditing of

companies: A survey of bankers, Accounting, Auditing &

Accountability Journal, 3(1), 18-37

JAN (2002). Garis Panduan Pengauditan Prestasi, Kuala

Lumpur: Jabatan Audit Negara Malaysia.

NAD (2006). Laporan Hari Audit Se Malaysia 2006, Kuala

Lumpur: National Audit Department.

Parker, L.D., (1986). Value for Money Auditing: Conceptual

Development and Operational Issues, Auditing Discussion

Paper No. 1., Melbourne, Australian Research Foundation.

Pollitt, C., Girre, X., Lonsdale, J., Mul, R., Summa, H. and

Waerness, M. (1999). Performance or Compliance?

Performance Audit and Public Management Reform in Five

Countries, Oxford: Oxford University Press.

Note: Complete references can be obtained from the author.