Public Sector Auditing and Who Played the Role of Auditing

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Public sector auditing is an important aspect in maintaining the accountability of the public sector. It provides an independence assurance on the proper use of public fund by the government to the legislature (parliament). Through auditing, the public as the contributor of funds can hold those responsible for managing public money accountable. The public could ensure that there is no misappropriation of public funds (generally through financial audit, ensure financial stewardship) and that the funds are used in an economy, effective and efficient way (generally through performance audit, ensure accountability).

In Malaysia, National Audit Department (NAD) carries out the auditing function in the public sector. Different countries may have different agencies playing the role of auditing the public sector, but they all serve the same purpose, that is to hold the public office and officer accountable in using the public money. For example, in Australia, the role is played by Australian National Audit Office (ANAO) while in United Kingdom, National Audit Office (NAO) would audit the public sectors.

All these national audit offices are headed by Auditor General who has crucial responsibilities in auditing public sector and government organizations. As in Malaysia, the Auditor General primarily responsible in auditing and certifying the appropriation and others account of government and report the result of examination to the Yang diPertuan Agong and State Rulers, who will cause it to be laid in either Parliament or State Legislatures. He is also responsible in enhancing public accountability by providing an assurance to the Parliament through a timely and accurate reporting of the Public Accounts and management of resources (Fatimah et al, 2008). In order to carry out his duties, Auditor General is supported by the audit committee, internal auditor, and the public sector accountant.

Extend of Auditing Process at Public Office

In the public sector, auditors were traditionally concerned with regularity of expenditure and compliance with laws, rules and regulations. They also report to the Parliament on the sufficiency in revenue collections and any wastage of public funds. However, since the introduction of new public management (NPM), the use of auditing has been spread due to the emphasis of NPM to use audit as a mechanism to control (Power, 1997). The scope of audit has been expanded from a purely financial audit to also assessing whether public services are provided Value for Money (Munro, 2004). Value for Money auditing is a recent expansion in the scope of auditing. It is an independent audit to assess the effectiveness and efficiency of utilization of public funds. It can also be defined as performance audit which includes economy, efficiency and program audits. In Malaysian context, as stated in Section 6(d) of Act 62 in Audit Act 1957, Auditor General has to perform audit to ascertain public funds have been applied to the purposes for which they were appropriated or authorized and the activities related to such purposes were carried out or managed in an efficient manner with due regard for economy and the avoidance of waste or extravagance. This means that instead of merely being a "waste-watcher", Auditor General has been required to play a role as "quality police" to certify the performance of public services (Hood et al, 1999).

Additionally, Tudor (2007) contended that performance audit has evolved to meet the need for greater information by the taxpayer and its representative, Parliament, mainly regarding the efficiency and economy in the use of resources by the public managers acting on behalf of the executive. In other words, citizens as consumers (i.e. citizens are the provider of fund and user of services) have the right to monitor and demand certain minimum standard of performance to ensure that their money is spent economically, efficiently and effectively (Lewis, 1993). Therefore, the person or organization audited has to show that they are acting properly to outside party, thus improving accountability (Stanyer, 1974). Concisely, all these authors had presented the fundamental argument for auditors to certify the performance of public office and officers.

How Auditing Hold Public Officers Accountable: In Malaysian Context

National Audit Department (NAD) is responsible for ensuring public sectors' accountability in Malaysia. The department is responsible to issue national audit report which includes explanations and feedbacks from auditees on issues raised instead of report by exception. The report also includes innovations, improvement and good practices introduced by the auditees. The impact of audit report to third parties such as the media, the parliamentarians and the public is important because it contributed in ensuring government accountability since the parties are becoming more important in raising issues on government financial management and performance. They play an important role as whistleblowers by providing information to NAD for further investigation. Third parties can easily access audit report from the NAD's website once the report has been tabled in the Parliament. The medias are also allowed to raise issues in the audit report. The Public Audit Committee has authority to call up ministries/agencies for explanation of the issues raised (NAD,2006). All of these are important to contribute towards better transparency and accountability of the government.

Besides, National Audit Department has also involved in management audit which include auditing of organizational management, budget controls, expenditure and revenue controls, loan and investments controls, as well as assets and store controls of government agencies. The outcome is reported directly to the Minister who in charge of the respective agencies to give them first-hand feedback on the overall performance of the agencies (NAD,2006). This can help to promote accountability because the government agencies will be questioned if deficiencies are found in their management and control. If the agencies want to protect themselves from criticism, they would like to maintain a strong internal control in order to avoid the situation that will cause queries in the management audit.

Moreover, National Audit Department emphasize and report on measurement of results achieved against targets set by carrying out performance audit. Key performance indicators (KPIs) are introduced to all ministries/department/agencies to assist in identifying accountabilities at all level of the organization. In order to assure public accountability, ministries/departments/agencies are required to clearly define the outcomes through KPIs. Monitoring and performance reviews are conducted regularly to ensure that targets set are achieved and enhance accountability. This approach helps to detect errors so that corrective actions can be taken. Performance is measured periodically in an objective and transparent manner to hold all those entities who entrusted with resources accountable to the public.

On top of that, National Audit Department also promotes the practice of prudence risk management. National Audit Department assists the organization in identifying potential risks and its likelihood to occur. They also anticipate its consequences to the organization and take corrective actions. This helps to identify parties who are accountable to the public.

Challenges of Public Sector Auditing

Since the introduction of performance audit in public sector, various opinions emerged. Some scholars argued that it is rational to have auditors certify the performance of the public sectors. However, some scholars were against the idea of performance audit due the negative aspects that it might bring. These negative aspects pose challenges for auditing the public sector.

Moreover, the evolvement of modern financial management in public sector has direct people's focus to the importance of auditing and control. The transition to accrual accounting and performance auditing has increased the need of different type of control and audit as compared to the past. These have resulted in number of challenges in auditing the public sector organizations.

Based on the study from various journals and articles, we found that public sector auditing is facing six major challenges, which will be explained in the following section.

Auditor General Audit Mandate

Audit mandate is very crucial for Auditor General to conduct the performance auditing. This audit mandate give a power to the Auditor General to go through all the information which required by the auditing in order to investigate public sector resources and operation. The expansion of this mandate is very important to maximize the benefits of performance auditing and to maintain auditor independence. However, it is not easy to make an expansion on audit mandate. This propose to expand the audit mandate could be risky because it might draw the auditors into political controversy as the policy formulation is under the responsibility of the ministers. (Zaidi Mat Daud, 2006)

Sufficiency Of Professional And Qualified Audit Personnel

The modernizing of financial management in public sector has brought changes in the public sector audit landscape. Thus, it requires a broad range of different technique and skills from the practitioner. The sufficiency of professional and qualified audit personnel is crucial and undoubtedly might pose great challenge to the National Audit Department. The shortage of professional auditor might give effect to their effort to focus on performance audit. The requirement on different technique and skills also increases the difficulties in finding and retain the experienced skilled staff. (Zaidi Mat Daud, 2006)

Let alone the issue of financial management modernization, conducting performance audit had already post some difficulties in term of staff resources. A research undertaken by Nosworthy (1990) shows that there is lack of staff resources within the New South Wales office of Auditor General due to increased extend of auditing to include efficiency audit into public sector audit. In other words, the increased responsibilities have placed significant pressure upon the auditors. This could be seen as a challenge for auditing. Dittenhofer (2001) also argued that due to the nature of performance audit that differs from traditional financial audits of governments, the auditors should possess additional competencies. Two specific areas of concerns are qualification and independence. In term of qualification, the auditors should have a complete understanding of the function, operations and accounting procedures of the government agency. The auditors should also be free from personal impairment (e.g. biases or prejudices), organizational impairment (place of the audit organization within the government structure) and external impairment (e.g. limitation on audit scope).

Independence Of National Audit Office

There are some queries arises on the issue that national audit offices are subjected to limitations such as influence from interested parties, particularly the government. This concern is possibly based on comments reported in local newspapers (Zaidi Mat Daud, 2006). For examples, in Malaysia, New Sunday Times 2005 has reported that Prime Minister, Tun Dr Mahathir Mohamad had questioned the Auditor General for hiding some information to make the government performance appeared well in the public's view. So, it can be challenging to the auditors to show their level of independency to public.

Cost and Time Limit

Thiel and Leeuw (2002) argued that auditing would increase the monitoring costs. Furthermore, current scope of auditing has been broaden from financial and compliance audit to include performance auditing. Thus, due to the cost and time limit, only a sample of the activities can be examined. Thus, auditors will have to decide the nature and extent of audit by considering the time and cost constraints, which will then determine how thorough the audit investigation can be. It can be challenging to the auditors to publish reasonably sizeable audit reports in a timely manner.

Develop valid and reliable performance indicators

If an invalid and unreliable performance indicator is used, it might cause undesirable results. For instance, Thiel and Leeuw (2002) wrote that performance paradox diminish the value of performance audit. The performance paradox refers to a weak correlation between performance indicators and performance itself (Meyer & Gupta, 1994; Meyer & O'Shaughnessy, 1993). As a matter of fact, if a performance indicator does not resemble or capture the real performance, auditing the achievement of the performance indicator is not equivalent to auditing the performance (3Es) of a program. For example, if the number of ambulances is used as the performance indicator of a hospital, auditing the number of ambulances would not show the hospital has performed well because there is no or less correlation between the indicator and the real performance. In other words, auditor could not really certify the performance of public office and officers.

Challenges in dealing with unintended consequences of performance audit

Many authors contended that auditing performance of the public sector results in some unfavourable outcomes. Smith (1995) argued that there are eight unintended consequences of monitoring and auditing performance. For example, the use of performance indicators can inhibit innovation and lead to ossification or organization paralysis. In view of this, auditing performance would stunt the development in the public office, which is not favourable. Besides, Thiel and Leeuw (2002) argued increased measure pressure might lead to dysfunctional effects such as tunnel vision and suboptimization. These unintended effects can jeopardize the effectiveness and efficiency of policy implementation. In that case, the auditing performance would in fact impair the performance of the public sectors.


Undoubtedly, auditing has significant contribution in holding and assuring those responsible for managing public money accountable. However, there are some authors who were sceptical about its efficacy due to the resulting unfavourable effects. Thus, this remains as a challenge that the government, public organization and scholars must overcome to create accountable public sector.