Public Sector Audit Research Articles

AUDIT IN A DEMOCRACY: THE AUSTRALIAN MODEL OF PUBLIC SECTOR AUDIT AND ITS APPLICATION TO EMERGING MARKETS - by Paul Nicoll

AUDIT IN A DEMOCRACY: THE AUSTRALIAN MODEL OF PUBLIC SECTOR AUDIT AND ITS APPLICATION TO EMERGING MARKETS - by Paul Nicoll

Investigating the audit fee structure of local authorities in England and Wales

The purpose of this paper is to model and test the audit fee structure of local authorities in England and Wales, with particular interest in fees charged by the Big 4 and other private sector auditors. The Audit Commission, a national public body under Parliament, regulates local government audits in England and Wales. The Audit Commission sets audit standards, appoints the auditors, and establishes a formula to determine standard audit fees. Constrained by the standard audit fees, each local authority and its auditor negotiate the actual audit fees. The majority of audits are conducted by district auditors (public sector employees under the Audit Commission), although about 25% of local authorities are audited by one of six private auditors (including three of the Big 4). Regression results for financial year 2000/01 have high explanatory power and work well to explain fee differences. Model relationships are somewhat different from US counterparts (which is the context of most of the audit economics literature) and type of authority partially explains fee differences. OLS regression results indicate a Big 4 discount for local authority audits. Because of expected self-selection bias, the Heckman procedure is used to analyse the differences between private sector and public sector auditors, which indicates no selection bias for Big 4 firms, although bias is present for private firms as a whole and district auditors in some models. When fees are size-adjusted, results continue to show a Big 4 discount. The Big 4 discount was robust to other follow-up tests.

Audit in a democracy: the Australian model of public sector audit and its application to emerging markets. by Paul Nicoll. Ashgate, Aldershot, 2005, 233 pp. ISBN: 0 7546 4429 4

Audit in a democracy: the Australian model of public sector audit and its application to emerging markets. by Paul Nicoll. Ashgate, Aldershot, 2005, 233 pp. ISBN: 0 7546 4429 4

Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies

This study reviews a decade of support by the World Bank and the Inter‐American Development Bank to parliaments and external audit agencies in Latin America. It underscores recent developments in development finance reflecting a broader understanding of the determinants of fiscal credibility and financial integrity. It reveals a learning curve in multilateral assistance to budget oversight institutions. It argues that there exists unexplored potential to improve the effectiveness of multilateral assistance to budget oversight institutions, including in the choice of strategies and instruments. More fundamentally, it underscores the need to tackle the underlying political economy of public finance accountability.

Combattre la corruption et améliorer la gouvernance financière : les institutions financières internationales et le renforcement du contrôle budgétaire dans les pays en développement

Curbing corruption and improving fiscal governance : Strengthening budget oversight and public sector auditing in emerging economies It is increasingly acknowledged that improving economic governance and fostering fiscal responsibility in emerging economies necessarily requires greater transparency and accountability in the management of public finances. Additionally, new and old forms of aid delivery, notably direct budgetary support and policy-based lending, involve greater reliance on national public finance management systems. Therefore, improving aid effectiveness and mitigating fiduciary risk also entail strengthening external scrutiny, financial oversight and fiscal control. These twin trends have led to a renewed in interest in the institutions overseeing the budget, in particular parliaments and external audit agencies. This study reviews a decade of support by the World Bank and the Inter-American Development Bank to parliaments and external audit agencies in Latin America. It underscores recent developments in development finance reflecting a broader understanding of the determinants of fiscal credibility and financial integrity. It reveals a learning curve in multilateral assistance to budget oversight institutions. It argues that there exists unexplored potential to improve the effectiveness of multilateral assistance to fiscal control institutions, including in the choice of lending strategies and the synergies between instruments. More fundamentally, it underscores the need to tackle the underlying political economy of public finance accountability.

The public sector audit expectations gap in Bangladesh

PurposeTo explore whether there is an audit expectations gap in the public sector between the Comptroller and Auditor General's (CAG) auditors in Bangladesh and the users of the CAG reports namely the Public Accounts Committee (PAC) of the Parliament that examines the CAG audit reports and the international funding agencies (IFAs) that provide external funding in the public sector in Bangladesh.Design/methodology/approachThe perceptions of CAG auditors and users of their reports were explored using a questionnaire based on a theoretical framework of accountability and six related audit concepts.FindingsThere were statistically significant differences in perceptions between 17 CAG auditors and the 15 members of the PAC on 13 of the 25 variables and between these 17 CAG auditors and nine representatives of the IFAs on 14 of these variables.Research limitations/implicationsThe relatively small number of respondents to this questionnaire is a limitation of this research project.Practical implicationsBetter training for the CAG auditors into their report users' information requirements and expectations and better training for the members of the PAC and the representatives of the IFAs coupled with more cooperation between the CAG auditors, the PAC and the IFAs might help to reduce this audit expectations gap in the public sector in Bangladesh.Originality/valueThis is the first time that statistical evidence has confirmed the existence of an audit expectations gap between CAG auditors and users of their audit reports in the context of the public sector.

Improving Fiscal Governance in Emerging Economies: Multilateral Support to Budget Oversight and Public Sector Auditing

There is increasing recognition that improving economic governance and fostering fiscal responsibility in emerging economies requires strengthening transparency and accountability in the management of public finances. This study reviews multilateral support to the strengthening of national parliaments and external audit agencies in Latin America and the Caribbean. It underscore recent developments in development finance, grounded in a broadening of the understanding on what conditions the credibility and performance of governmental financial management systems. It reveals a learning curve in multilateral assistance to budget oversight institutions, as well as some of its limitations linked to the political economy of financial accountability. It argues that there exists unexplored potential to improve the effectiveness of multilateral assistance to fiscal control institutions, including in the choice of lending strategies and the synergies between instruments.

E‐commerce impact on Canadian public sector audit practice

PurposeThis paper reports on the research conducted into the adaptations Canadian public sector auditors have made to the emergence of e‐commerce and e‐business in the delivery of public services.Design/methodology/approachA comprehensive review of the literature was completed as a foundation for creating a semi‐structure interview questionnaire used in a series of interviews with audit executives from 20 audit organizations in Canada's public sectors.FindingsThe study found a distinct disconnect between what is reported in the literature and what has actually happened in practice. Practicing auditors do have a significant interest in the impact of e‐business on the audit profession specifically and on their client organizations generally. But there is significant disagreement about whether e‐business constitutes just another set of technologically mediated changes, not much different from the many others of the past 30 years, or whether e‐business is truly disruptive in nature. The consequence of this disagreement is difference in audit practice among constituencies and highly variable dependency on external expertise in favour of developing internal capacity.Research limitations/implicationsThe research is limited to internal auditors of public sector organizations in Canada.Practical implicationsA key area for future research is the impact on e‐business on horizontality of management practice in the public sector and the need for more holistic audit interventions.Originality/valueThe paper identifies key differences between what is said in the literature and what is done on the ground. It identifies key lessons from audit experience related to evolving e‐government, including the management of new risks. The research is valuable to both researchers and practicing public sector audit executives alike.

Further evidence on the roots of public sector operational (value-for-money) auditing: a response to Flesher and Zarzeski

Flesher and Zarzeski in their recent examination of the North American origins of value-for-money auditing highlight the reluctance of public sector auditors in Australia, New Zealand and Britain to assume operational auditing as part of their mandate until the 1970s, and then only gradually. It is suggested here that the very different constitutional forms of Westminster and American governments and their associated conventions denied auditors-general the authority to follow the American example. In their paper Flesher and Zarzeski also recognize Canada as an unusually early adopter of operational auditing, although suggesting that actual practices owed little to direct borrowings from the US. Canada was also the primary influence on the form taken by value-for-money auditing in other Westminster countries. It is suggested here that the decision by Canada in the early 1960s to recruit auditors-general from the private sector accelerated the transfer of value-for-money auditing to the public sector as did the admiration of Canadian auditors-general for the work of the GAO, even though they were constitutionally constrained in the extent of their borrowings.

Victorian parsimony and the early champions of modern public sector audit

In most Westminster governments the essential characteristics of central government audit can be traced to the British Exchequer and Audit Act 1866. The Act was the pinnacle of government finance and accountability reforms implemented in the middle decades of the nineteenth century which were motivated by the need both to control and reduce government spending. The well-recognised Victorian affection for retrenchment gained its influence over these reforms through the contributions of key committed individuals, most importantly the politicians William Gladstone and Sir James Graham and the civil servant Sir Charles Trevelyan, all of whom were unremitting advocates of economy.

An Impeditive Administrative Culture? The Legacy of Australia's First Auditor‐General on the Australian Audit Office

This historical study provides an account of the Australian Audit Office from its formation in 1901 until the end of the term of Australia's first Auditor‐General in 1925. The Audit Office was created to assist the Commonwealth Government in discharging and reporting on its accountability for the economical use of resources. The philosophy upon which the Audit Office was created was one based on small government where a minimalist role for the audit function was envisaged. Accordingly, the initial Audit Act dictated a detailed audit methodology. However, the expansion of Commonwealth activities due to the outbreak of the First World War, the realities of a decentralised Commonwealth administration and the more commercial activities of government created numerous problems for both the Office and government. The Auditor‐General was unable, or unwilling, to adapt his audit methodologies to suit the changing circumstances of Australian public administration and the workload of the Audit Office periodically fell into backlog. Relations with the executive became strained over these matters prompting intervention by subsequent governments. This early period is important historically as it provides a window through which to view the development of the public sector audit function and its contribution to an efficient public sector. In addition, the events of this period illustrate the importance of relations between the Audit Office and the government, and the role of the Auditor‐General in contributing to an efficient public administration.

Speaking Softly Without Big Sticks: Meta‐Regulation and Public Sector Audit

Australian government has undergone an “audit explosion” in the last twenty years. This article observes, first, that the constitutional function of public sector audit institutions (AIs) gives them a strong cultural commitment to the assessment of the regularity and legality of public expenditure. New functions connected with performance audit and evaluation of nonfinancial performance indicators are liable to be interpreted through the lens of these more traditional concerns. The second observation is that, if we think in terms of “regimes” of financial control, we find that AIs form only part of the overall regulatory regime. This calls into question the coherence and potential for effectiveness of regimes of financial control. However, AIs could also be conceived as “meta‐regulators” with the capacity to steer the self‐regulatory capacities of public sector organizations in respect of financial controls. Auditors may be effective as meta‐regulators through speaking softly, even though they demonstrably lack big sticks.

Australian auditors‐general involvement in probity auditing: evidence and implications

Probity audits, real time audits which review compliance with process and conformance with guidelines, are gaining popularity in the Australian public sector. Prior research has noted that the conduct of probity audits by auditors‐general may pose problems for their independence. This paper provides empirical evidence on the extent to which probity audits are performed by auditors‐general in Australia, and the perceptions of auditors‐general to any dilemmas posed. The study finds that approximately half of the auditors‐general conduct probity audits, and that “independence” is a key concern for those who do not perform these tasks. This in‐depth study of probity audits contributes to an understanding of the changing nature of public sector audit.

Public Sector Auditing, Accountability and Independence: a Study of ASEAN Countries

Supreme audit institutions, such as the auditors‐general, are considered a crucial link in the accountability chain between parliament and the executive arm of government. The purpose of this study is to examine the enabling legislation of the supreme audit institutions of the Association of Southeast Asian Nations (ASEAN) member countries from a public sector accountability and independence perspective. Following on from INTOSAI (1998), English and Guthrie (2000) and De Martinis and Clark (2001), this study uses an accountability and independence framework to identify and compare the current legislation applicable to the supreme audit institutions of the ASEAN member countries with regard to independence, autonomy, mandate, funding issues, and related parliamentary powers. This study finds that while on average each jurisdiction has addressed slightly less than half the total number of issues under examination, there is considerable diversity with regard to the particular issues addressed. The study suggests policy implications to further strengthen the provisions for accountability and independence of supreme audit institutions through amendments to the enabling legislation of the various jurisdictions.

The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts

This study investigates the market for audit services in the UK National Health Service (NHS). The market has a number of interesting features, including the presence of the Audit Commission as a regulator, appointer and provider of audit services. Following a theoretical overview of audit pricing in the NHS, evidence is provided on the behaviour of private sector auditors in an environment where audit risk characteristics differ from the private sector. The research also investigates, for the first time in the public sector, the relationship between audit fees and non–audit (consultancy) fees. Comparisons are also drawn between audit fees in the public and private sectors in an analysis of audit fees by industry. Despite some key similarities, the study shows that a number of differences exist between private and public sector audit fee models. In particular, we find no evidence of Big 6 (or mid–tier) auditor premiums, but we do find a significant negative relationship between audit and consultancy fees providing support for the ‘knowledge spill–over’ hypothesis. In addition, the fees charged to trusts appear significantly lower than their private sector counterparts, despite trust auditors having additional duties to perform. Possible explanations for this finding are offered in the paper.

Learning from International Public Management Reform Experience for Management Control Systems

Internationally, the past two decades have seen considerable changes in the management and control of public sector organisations. Reform has been promoted on the grounds that the public sector was too large and cumbersome, organised on the wrong principles and in need of re-invention and institutional renewal. At least five different categories of change are apparent in this reform, referred to as 'new public financial management' (NPFM). These include changes to financial reporting systems; the development of commercially based, market oriented management systems and structures to deal with the pricing and provision of public services; the development of a performance measurement approach; the devolution of or delegation of budgets; changes to internal and external public sector audits, notably in terms of monitoring service delivery functions; and providing reviews of the efficiency and effectiveness.A key issue to emerge is just how successful the reform movement has been. This article seeks to answer this question by suggesting via a posteriori reflection on international public management reform experiences in Australia and more specifically in the state of Victoria.The fundamental elements of the financial management reforms to have been adopted in Victoria are a full accrual approach to planning, budgeting, resource allocation decisions and reporting; fully-costed service provision; a focus on the outputs departments provide; and a change in incentives underlying management of total resources available to departments. The recommendations relating to transforming institutional rules and relationships were intended to realign governance structures (organisation), and concomitant incentives underlying them, more closely with private sector arrangements (methods).Mirroring concerns in the literature, there are considerable reservations regarding the Victorian reforms. The transparency of government decision making and the accountability of the executive to the parliament (VPAEC, 1998), particularly in an environment of increased contracting with private sector entities, is an area of particular concern. Other concerns relate to the government's tendency to outlaw public criticism and comment on policy issues, either directly by public employees, or indirectly by tightening freedom of information legislation, the use of 'commercial-in-confidence' contractual arrangements with private-sector service providers, and an attempt to muzzle the state's auditor-general.

The Best Value Agenda for Auditing

The developments in the public sector auditing can be seen against a backcloth of adverse publicity for private sector audits. This focus on the private sector has meant public sector developments have gone largely unnoticed. The advocacy of Best Value is a logical and useful development in addressing the needs of the citizen with an active interest in the public sector.

The Problems of Establishing Internal Audit in the Sudanese Public Sector

This paper uses interview and direct observation research methods to explain the failure to establish internal audit in the Sudanese public sector. The specific problems highlighted in this paper of low salary levels, low levels of staff training and expertise, low esteem and motivation of staff are seen in the context of a very limited technological infrastructure, and a lack of co‐operation and co‐ordination between the various parties responsible for internal audit in the public sector. Internal audit in the Sudan takes place against a background of economic stagnation and political instability, and within a culture in which corrupt and irregular practice is endemic and institutionalized at all levels of society. In such circumstances and without the political will to strengthen its potential and practice it is likely that internal audit will continue to be marginalized in the foreseeable future.

The Effect of Contracting-out Audits on Resource Allocation and Efficiency in Public Sector Audits

ABSTRACT: Significant changes in public sector have impacted on the operations ofgovernment audit offices in several countries, notably, Australia, New Zealand, Canada,United Kingdom and the United States. Government audit offices are required tooperate in a more contestable or market-like environment, where they are accountablefor an efficient and effective provision of public sector audit. The purpose of this studyis to compare the efficiency of in-house and contract-out arrangements to deliverfinancial audits in the public sector. This study examines the audit cost efficiency withinthe context of the current public sector arrangement at the state level in WesternAustralia (WA). The results for 178 public agencies in WA suggest that contract-outaudits are more costly than in-house audits but the result is conditional on agency type.Specifically, for statutory authority audits, the costs of contract-out audits are, onaverage, significantly higher than in-house audits. For hospital audits, there is nosignificant difference in audit costs between contract-out and in-house arrangements.Sensitivity analyses reveal that the supervision costs incurred by the Auditor-General tomonitor audit quality have a significant impact on the interpretation of the costefficiency results.

A study of the effects of accountability and engagement risk on auditor materiality decisions in public sector audits

Public administration theory suggests that increased accountability in the public sector influences the auditor to lower materiality levels; thereby increasing the audit sample size; which decreases the likelihood of an inappropriate opinion. Accounting theory posits that engagement risk leads the auditor to lower materiality levels to decrease the likelihood of rendering an inappropriate opinion, in an effort to avoid litigation. The results of this study indicate, that in public sector entities, accountability guides the auditors’ materiality decisions.