Public sector refers as the portion of economy that provides basic government services. The public sector is controlled by national, state or local governments. Public sector services vary from country to country, but in most countries the public sector encompasses services such as the military, fire fighting, public roads, police, public transit, communications, education, social programs, healthcare and others. Generally, the public sector provides services to the welfare and benefit to all of society. The resources that used in providing public sector services are basically come from public funds, which generated from tax revenue collected from tax payers. So, tax payers stand as one of the major entity of public sector's stakeholders, together with electors and Parliament. As stakeholders, those entities would expect public sector carried out with good performance, legislated and compliance with regulations.

In this report, the major focus in public sector auditing is on maintaining public accountability. The purpose of accountability process of strengthens control system by given independent assurance on the way the government use the public funds toward legislature (parliament). This is because government acts as "agent" to use the resources and give authority to achieve their goal. Therefore government has the responsibility to account the ways they utilized the resources and the outcome. Thus the person who misused the resources for not the purpose as it supposed to accomplish would be punishing under public accountability. (The institute of Internal Auditors (IIA), 2006)

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In maintaining public accountability and ensuring the effectiveness of public sector governance, public sector auditors as known as government auditors play a vital role. According to Zaidi Mat Daud (2007), in Malaysia, the public sector auditing role is monitored by National Audit Department (NAD) which leaded by the Auditor General. When Malaysia gets independence in 1957, legislated audit and scope of government auditing in Audit Act was introduced. There have been some developments in the audit approach to meet the changing throughout this period.


According to Muhammad Akram Khan (n.d.), public sector auditor would express their opinion base on the audit procedure carry out more or least same as the corporate auditor. However public sector auditor would deeper than corporate auditor by public sector auditor need to check the public expenditure incurred and revenue collected accordance to rules and regulation that not the responsibility of corporate auditor.

In the recent years, public sector had experienced significant expansion in all over the world. There are several reasons for this significant expansion. Firstly, it is closely related to the increasing public concerns for more accountable and transparent governance. Traditionally, public sector auditing was relating to the financial and compliance auditing. Public sector auditors have the duty to provide an independent assurance over the use of public funds by the government. They need to ensure that the recorded financial transactions are correctly authorized and comply with laws and regulations.

Therefore the public (via parliament) commented that the audited report that based on the financial information only was insufficient. The information that provided in the audit reports was insufficient for them to determine the accountability of government agencies in the operating of programs or activities. More and more people start to concern on the publication of public sector audit report as they want to get known on the performance of government agencies project. People want to ensure that the resources that used in the government agencies project are appropriate and as stated objective since it is the public fund. Moreover, the increasing democratization and attention on corruption people are contribute to the changes in public sector auditing; by where public acquire to have more sophisticated auditing.

Beside the above mentioned reason, the changes in the public sector auditing were also influenced by the reforming of public sector. The scope of government activities expanded, form a simple function of law and justice of administrative to play an active role in social-economic developments which has increased the size of public expenditure. Besides that, also have claims for resource allocation. As the resources are limited therefore demand a rational decision making in public expenditure. (Muhammad Akram Khan, n.d). As for the changes, it was a need for the government auditor to review the public sector auditing. The job scope and authority of public sector auditing have to expend as the changes in public sector.

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Hence, both issues had led the National Audit Department (NAD) to expand the traditional public sector auditing into a broader area, which is relating to the "Performance auditing" or we can also call it as "Value for money audit". Generally, many auditors use both terms interchangeably. In this report, we refer it as the formal term "performance audit", which adopted by the International Organization of Supreme Audit Institutions (INTOSAI) Auditing Standards.


According to Zaidi Mat Daud (2007), definition of performance auditing in Malaysia was given by International Organisation of Supreme Audit Institutions (INTOSAI). That concern on three elements that are economy, efficiency and effectiveness of the activities carried out by government agencies. There are:

Audit on the economy of administrative activities must comply with the sound management policies and administrative principles and practices. Economy will focus on the minimum usage of money, manpower and other resources.

Audit on the efficiency of utilization human, financial and other resources to determine the deficiencies by audited firm. Efficiency of audit is to make sure that the resources had been use optimally to achieve the desired outcome.

Audit effectiveness of performance to achieve the audit firm objectives and actual impact of activities compared intended impact. Audit effectiveness is based on whether activities carried out had achieved the desired outcome.

Besides definition indicated by INTOSAI, Waring and Morgan defines performance audit as "a systematic, objective assessment of the accomplishments or processes of a government program or activity for the purpose of determining its effectiveness, economy, or efficiency".

According to Stockholm and Kjell Larsson (2004), the idea to form the basis of performance auditing is public accountability. Public accountability means the person who responsible for the government program is responsible for running all programs effectively and efficiency. Accountability let the public insight into the activities carried out by government ideas. Performance auditing is a way to let the public stakeholder to exercise their control and to obtain insight into the outcome and running of the activities carried out by government agencies. Besides that, performance auditing also provide the answer does the government utilized the resources wisely and appropriately.

In this performance auditing has two main objectives that are ensure government accountability and promote better management practices. As this report is more focusing on the accountability of public sector auditing so we just emphasis on the government accountability objective of this performance auditing. According to Zaidi Mat Daud (2007), the ways carry out by this performance auditing to ensure government accountability by exercising effective legislative control and oversight. As the resources are limited, so to decide the allocation resources appropriately the auditor must provide more information on the value of the result or output. This value of result or output is not measure in monetary basis but in term of degree of attainment and quality services provided. Based on that parliament had required it should be base on managerial aspect rather than financial basis such like more focus on how effective and efficiency government implement and carried out program rather than amount spend for each program. Therefore performance auditing can provide more useful information to parliament and stakeholder on how effective and efficiency the agency manage the resources.

Thus, it is clearly shows that performance audit is to examine public sector's management and performance in the aspects of economy, efficiency and effectiveness and also to provide recommendations for performance improvement. From above, performance audit is also important in maintain government agencies accountability. However, in Malaysia, performance auditing practices suffering some weakness which would affect the effectiveness of the government agencies. As we have an effective auditing system it could ensure the accountability of public agencies are in the right place.



As the traditional public sector auditing has expanded into a broader area, public sector auditors have faced some problems and challenges in promoting public accountability by change into performance auditing. According to Zaidi Mat Daud (2007), one of the problems is expansion of the power in the audit mandate. The power to carry out the audit would determine the effectiveness of the Auditor General in performance auditing. Therefore audit mandate is important because it give the power to investigate all the public resources and operation by access all the information needed to Auditor General. Currently, Malaysia audit mandate is same as the other commonwealth countries which only briefly questioning the merit of the policy. There are some arguments saying that they should cover the issues of effectiveness of the merits of the policy into their scope. This reason for that is to maximise the benefits of performance auditing and maintaining the independent of the public sector auditor. However, the process of including the merits policy into responsibility function of audit mandate is difficult and risky because this issue can be arguable and debatable. It might influence the auditor joins into political arguments. The responsibility of the issues of merits policy is under minister as they are setting the policy for the auditing.

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Besides that, when NAD expanded the audit function to performance auditing, it means the scope had become broader as performance audit scope is broader compare to financial audit. The professional and qualified auditors possessed by the National Audit Department are inadequate. For the purpose to run a more comprehensive auditing, different techniques and skills are required by the public sector auditors. However, the auditing educational, training arrangements and number of audit staff do not meet the requirement of the modern public sector auditing. The problem of inadequacy of the audit staff in National Audit Department can be proved by the numerical numbers in years 2005 and 2006. In 2005 and 2006, only 128 times and 143 times of the performance auditing is being carried out. (Zaidi Mat Daud, 2007) The basic facilities for training and research are not enough as they are lacking of professional and qualified auditor. Hence, the performance auditing that carried out is much lower than the number of government agencies, ministries and departments at the state and federal levels.

In addition, acoording to Zaidi Mat Daud (2007) the public sector auditors in Malaysia are facing the problem with timeliness issues for Auditor General's audit report. The publication of the audit report will be late because the report is comprehensive. Audit General Department need to issue an audit report that based on financial information and relevant economic information that related to government agencies' projects. For that reason, it consumes longer time to gather the both needed information for government auditor. They are facing the problem of timing gap after implementation of the performance auditing into the public sector auditing. NAD was concerned about this issue and took several alternatives to solve the problem of timeliness. As a result, the timeliness issues on the publication of audit report had substantial improvement. Although public sector auditors have substantial improvement on issue of timeliness in audit report publication, they are still unable to settle the problem. The problem of timing gap still exists. For instance, the audit report for 2005 was completed after the middle of the year 2006, which was completed only in October 2006.

Besides, the National Audit Department faces the independence problem as well. Some non-governmental organizations and third parties argue that National Auditor Department is not independent enough as they will be influenced by outside parties, especially government. In New Sunday Times that reported in 2005, it stated that Audit Department was under the care of our Prime Minister. Next, our fourth Prime Minister, Tun Dr Mahathir Mohamad had also inference as to request that the Auditor General should not publish some issues to public. It is because he wants to avoid the attention from public and making it sensational. Then, more importantly, Audit General had admitted that the undercover or unreleased national interest and policy issues will have an impact on the information that provided to public. As if it is fully disclosed the relevant national interest and policy issues in the audit report, it will uncover the problems. The position and reputation of the project for government agencies will be different because it disclosed all the problems that the government agencies facing now. (Zaidi Mat Daud, 2007) In summary, they did not have the freedom to disclose the content of the audit report.

Another challenge is lack of guidelines and standards that can use as benchmark in performance auditing. Benchmarking is important in performance auditing as performance auditing will need indicators or guidelines to check whether the result can act as effective feedback to the public sector. Although there is suggestion that some sources can be used in developing of performance auditing criteria, but that set of developed criteria or indicator may also not suitable or not able to reflect the real condition of a public sector in performance auditing. The example of the sources include using engineered standard, comparable performance, historical performance, or through agreement and discussion.


Besides the expansion into performance auditing, NAD also has come out with some innovative and unconventional approach to establish accountability in Malaysia Public Sector. According to The Asian Organization of Supreme Audit Institutions (ASOSAI) (2006), one of them is NAD actively to educate and give awareness to politician, government officers and interested parties on accountability issues, good governance, transparency and integrity. Moreover, audit and accountability is being a mandatory topic in all government induction courses that participated by NAD senior officers.

Several program has been introduced by NAD in 2002 to improve good governance and accountability such as Adopted Agencies, Audit in - Going construction Projects and ICT System. Furthermore NAD has also provided advisory and consultancy role to Ministries, Departments, or Government Agencies on financial management and project management. NAD also helps organization to identify risk and mitigate the potential risk responsible their action or inactions. (ASOSAI, 2006)

According to The International Journal of Government Auditing Inc (INTOSAI) (2008), on 4th of November 2007, NAD of Malaysia and Audit Board of the republic of Indonesia (BPK) cooperated on Public Sector Auditing by signed a Memorandum of Understanding (MOU) which took place in Mexico. MOU is the first cooperation agreement between two countries of the Association of South East Asian Nations (ASEAN). In this agreement, Supreme Audit Institutions (SAI) Malaysia and Indonesia will work together in the training and research of public sector auditing. Tan Sri Ambrin Buang, Auditor General of Malaysia stated that he wished this agreement can assist both countries in information, knowledge, experience sharing and exchange through seminar, conferences, training, and consultation. This cooperation is only emphasize on information exchange in auditing areas but it also for other areas such as good governance of public sector in Asia.

According to ASOSAI (2006), Government of Malaysia also has commitment in improving government accountability by introducing several mechanisms. One of the efforts is the setting of Integrity Committee and Committee for Financial Management and Accounts at ministries, department or agencies. To improve the administration and financial management transparency, integrity and accountability, the committee's function are more or least like audit committees that do periodic review of controls, regulations and procedures of the public sector. Besides that, Integrity Committee needs to make recommendations on the complaint and weakness they received in order to improve the condition. Head of Department is the leader of both committees. The quarterly report prepared by Committee for Financial Management and Accounts have to submit to Treasury while quarterly report prepared by Integrity Committee have to submit to the high level committee on integrity chaired by Prime Minister .

Besides that, the other effort is the rule that all the members of Executive, Legislative Assembly and civil service need to disclose their asset for screening and record purpose. This is directed by Government of Malaysia. (ASOSAI, 2006) Moreover, they also need to declare acquisition of asset and the resource of the acquisition fund. All of the rules are to give assurance to government integrity and accountability by keeping a repository system on declaration of assets.

OpinionS toward public sector auditing

Auditing in public sector is not an easy as it involves various governmental departments and agencies which mostly constituted in complicated structures. Besides, what are going to audit by a public sector auditor are related to the usage of public fund and other resources. It is much more difficult and complicated if compared with private sector auditing. In private sector, the auditors are accountable to the audited company's stakeholders who consist of shareholders, suppliers, creditors and etc. The responsible is heavy, but it becomes much heavier in public sector. Public sector auditors are accountable to a wider community which includes Parliament, elevators and tax payers. They seem like the watchdog of the public to ensure the government departments or agencies are using the public fund in proper way. So, public sector auditors play important role in establishing the public sector's relevancy and reliability.

Apart from that, many surveys have showed a global trend of public trust declining towards public sectors. Public today becomes more knowledgeable and sophisticated. They tend to be cynical towards government policies or practices. They always like to know what actually government is doing and how well government spends the public fund. With this, the traditional financial and compliance auditing will not able to satisfy the public requirements. Performance auditing that brought into public sector auditing will able to overcome the shortfall of the traditional auditing. Although there are several challenges arose from performance auditing, in our point of view, performance auditing is still applicable and workable. Despite from its problems, performance auditing will able to show public regarding the government department's performance in 3 perspectives: economy, effectiveness and efficiency. Public can gain better sights of it. For the public sector itself, performance auditing can be their 'enemy' as it used to examine its program, function or management system and detect if there is any fraud. On the same time, it can be also a useful tool because the results from performance auditing can help the certain public sector to improve.

By looking at private and public sector in the aspect of performance auditing, we can find the difference in between. In private sector, a company generally has its particular objectives that easily to define which usually relate to profit maximization. However, in public sector, it becomes different because there are many entities involved in public sector. Thus, the public sector's objective can be very broad which may involve both profit and non-profit dimension. This makes the performance indicators are relatively harder to define, unlike for private sector. It adds the difficulties and challenges in interpreting the public sector performance during auditing.

Although there is several problems that not easy to overcome in short time, government continuous initiatives and efforts will able to reduce the problems to a lower level. Performance auditing in Malaysia's public sector auditing should be enhanced.


The public sector is performing a principal-agent relationship. The official as an agent is accountable for the principal for the stewardship of resources. If audit activity is effective, risks inherent in the principal-agent relationship can be reduced. Auditor is responsible to provide an objective and independence assessment on the agent's accounting and report whether the use of resources is according to the wishes of the principal. Actually there are some factors that inherent in the principal-agent relationship which is moral hazards, remoteness, complexity, and consequence of error.

Public sector auditing had broadened its focus from individual transactions to control program operation, but it should maintain the characteristic which based on its credibility by including unbiased opinions towards the subject under audit. This is because the credibility strengthens public governance which done by evaluate the officials honestly, fairly, transparently and in accordance with laws and regulations. We proposed that elected and appointed officials at all levels of government should support the effective audit activities by establishing independent audit functions that meet all of the key elements.

In conclusion, public sector auditing is important to make sure that the public entities had fulfilled their duty to be accountable to the citizen by providing objective assessments on whether they manage the public resources effectively and responsibly.