Building Capacity.

Creating Impact

Impact in Audit
 Building Capacity. Creating Impact

Understanding "Impact"

Definition of Impact:

•In an auditing context, it means the effect or influence of an audit

on government or society
•It also means change resulting from a performance audit
(qualitative or quantitative)
 Building Capacity. Creating Impact

Value and Impact of Audit Institutions

• Audit institutions play a crucial role in ensuring transparency, accountability, and
efficiency in government operations worldwide.
• By independently examining financial records, operations, and compliance with
regulations, these institutions help prevent fraud, detect inefficiencies, and
promote good governance practices.
• They provide assurance to stakeholders, including taxpayers and international
bodies, that public funds are managed responsibly and in accordance with
established laws and procedures.
• Additionally, audit findings and recommendations often lead to improvements in
public sector management, policy formulation, and resource allocation, thereby
enhancing overall economic stability and trust in government institutions
globally.
 Building Capacity. Creating Impact

• Inherent Value:
• Foster good governance
• Enhance accountability
• Promote transparency
• Build trust in public administration

• Role as Agents of Change:

• Seek to "make an impact"
• Impact defined as changes in public service or society from performance
audits
 Building Capacity. Creating Impact

Role and Functions of Audit Institutions

• Audit institutions play a crucial role in ensuring transparency, accountability,
and efficiency in public administration. Their primary functions include:
1. Financial Oversight: Auditing government finances to ensure proper
allocation and use of public funds, preventing mismanagement and fraud.
2. Compliance Verification: Ensuring that government entities adhere to legal
and regulatory requirements in their operations and financial reporting.
3. Performance Evaluation: Assessing the effectiveness and efficiency of
government programs and activities to improve service delivery and resource
utilization.
4. Risk Management: Identifying and mitigating risks associated with financial
operations and governance processes to safeguard public resources.
5. Independence and Objectivity: Operating independently to maintain
impartiality and credibility in their assessments, free from political or external
influence.
6. Reporting and Recommendations: Communicating audit findings and
recommendations to relevant stakeholders, including policymakers and the
public, to promote transparency and accountability.
 Building Capacity. Creating Impact

Examples of Impact-Oriented Audit

Offices
• Office of the Auditor General (OAG): Focuses on significant
issues for measurable impact
 Building Capacity. Creating Impact

Measuring Audit Impact

• Starting in the 1990s, many governments changed their management
philosophy from managing outputs to managing results (outcomes).
• Accordingly, public sector organizations had to change how they
measured and reported their performance to emphasize outcomes more
than they used to.
• This situation created a challenge for public sector organizations
because they now had to deal with what he called the “attribution
problem.”
• This problem arose because the focus on performance measurement
shifted from outputs, a part of the result chain (Figure 1) that
departments and agencies have control over, to outcomes, which can be
influenced by other external stakeholders and are therefore not under
the sole influence of departments and agencies.
Building Capacity. Creating Impact
 Building Capacity. Creating Impact

• To ensure coherence and consistency in practice, many government

audit institutions have adopted expanded reporting practices under a
"managing for results" philosophy.
• This shift involves not only reporting on their outputs, such as the
number of audits conducted, but also on the outcomes and impacts of
these audits.
• A key challenge in this approach is the attribution problem: determining
how much of the outcome can be directly linked to their audits, given
that other factors like reforms, new legislation, and the adoption of best
practices also play a significant role in improving governance and
accountability.
 Building Capacity. Creating Impact

Reporting Outcomes
• To effectively report on outcomes without tackling the attribution problem
directly, the focus should shift from "ultimate outcomes" to
"intermediate" or "immediate outcomes."
• This approach makes it more practical for audit offices to report their impact.
Instead of assessing long-term contributions to overall accountability or public
health, the focus would be on evaluating their influence on specific practices or
programs within public sector organizations over a shorter timeframe.
• This shift simplifies the process and makes it more manageable to demonstrate
the auditors' impact.
• Immediate outcomes result directly from the delivery of outputs.
Intermediate outcomes are the changes anticipated after immediate outcomes
are achieved. Ultimate outcomes are the furthest reaching changes that can
reasonably be attributed to the program after the immediate and intermediate
outcomes have been achieved
Building Capacity. Creating Impact
 Building Capacity. Creating Impact

Table 1 - Immediate, Intermediate, and Ultimate

Outcomes
Term Definition Descriptors Examples (For an audit
office)

Immediate An outcome that is directly attributable These outcomes are often at Parliament is better
Outcome to a policy, program, or initiative’s the level of awareness of a informed.
outputs. target population.
In terms of time an increase in frame,
these are short-term outcomes.

Intermediate An outcome that is expected to
Outcome logically occur once one or more
immediate outcomes have been
achieved.
In terms of time frame, these are
medium-term outcomes.
These outcomes are often at
the change of behavior
level among a target
population.
Parliament holds the
government to account.
Audited organizations take
steps to implement audit
recommendations.

Ultimate The highest-level outcome that can be These outcomes represent a The audit office contributes
Outcome reasonably attributed to a policy, change of state in a target to better-managed
program, or initiative in a causal population. government programs and
manner, and results from one or more better accountability to
intermediate outcomes having been Parliament.
achieved. These outcomes usually
represent the raison d'étre of a policy,
program, or initiative. They are
longterm outcomes.
 Building Capacity. Creating Impact

• Audit institutions often focus on intermediate outcomes to assess the

impact of specific audits on selected organizations. Common indicators of
impact include the implementation rates of audit recommendations.
• Academic studies also tend to examine the impact at the level of individual
audits and intermediate outcomes.
• Furthermore, it is possible to compile data from individual audits and
present annual results to offer a broader view of impact.
• Some audit offices have successfully tracked the annual financial impact of
their performance audits, including savings or additional revenues for the
public purse.
• This aggregated data provides a more comprehensive, albeit not
exhaustive, perspective on the effectiveness of audits.
 Building Capacity. Creating Impact

Measuring Audit Impact Cont….

• Challenges:
• Difficult to attribute specific outcomes to audits due to
contributions from multiple stakeholders
• Focus on individual audits and monitoring audit
recommendations

• Possible Negative Effects:

• Ossification, tunnel vision, short-termism, sub-
optimization, window dressing, reduced motivation
 Building Capacity. Creating Impact

Negative impacts of Audit

• Ossification: an excessive attention on formal adherence to rules and
standards, which ultimately inhibits innovation within an organization and
causes it to ossify.
• Tunnel vision: an excessive emphasis on activities whose results can be
easily quantified and measured, at the expense of activities whose results
are not so easily quantified.
• Short-termism: an excessive short-term focus on achieving good results
against performance indicators valued by auditors at the expense of
keeping sight on long-term objectives.
• Sub-optimization: excessive efforts and resources spent on improving a
system at the expense of other systems within an organization.
• Window dressing: creating systems, procedures, and so on, merely to
keep auditors satisfied, while behind this formal facade things continue as
before.
• Reduced motivation: auditees showing a reduced commitment to their
organization following a critical performance audit.
 Building Capacity. Creating Impact

Factors That Can Influence the Impact of

a Performance Audit
Internal Factors (Audit Process) External Factors (Environment)

Audit topic selection Actions and expectations of

Reputation and credibility of the audit
office
Relationships with the auditees
Expertise of the auditors
Parliamentarians
Media and stakeholder engagement
Willingness to make changes within
audited organizations; tone at the top
Political will

Quality of the audit reports Timing of the audit

Relevance of the audit recommendations Timing of policy reforms

Efforts to disseminate the audit findings Other events competing for public
attention
Follow-up mechanisms Expectations of citizens for change
 Building Capacity. Creating Impact

Factors Influencing Audit Impact

1. Regulatory Environment
•Legal Requirements: Audits are shaped by laws and regulations which
establish the framework within which auditors operate.
•Compliance: Adherence to regulatory standards ensures audits are conducted
with integrity and objectivity.
2. Corporate Governance
•Management Practices: Effective corporate governance ensures proper
oversight and accountability, impacting the quality of audits.
•Board of Directors: Active and independent boards enhance audit effectiveness
through better oversight.
3. Economic Conditions
•Market Stability: Economic stability influences the reliability of financial
reporting and the focus areas of audits.
•Economic Fluctuations: During economic downturns, audits may focus more
on risk assessment and fraud detection.
 Building Capacity. Creating Impact

4. Technological Advancements
•Audit Tools: The use of advanced audit software and data analytics can improve
the accuracy and efficiency of audits.
•Cybersecurity: Increasing cyber threats require auditors to focus on the
integrity and security of financial data.
5. Professional Standards
•Ethical Guidelines: Adherence to ethical standards ensures auditors conduct
their work with professionalism and impartiality.
•Continuing Education: Ongoing professional development helps auditors stay
updated with the latest practices and standards.
6. Client Size and Complexity
•Business Scale: Larger and more complex organizations require more extensive
audit procedures.
•Operational Complexity: Diverse and intricate operations can complicate the
audit process, requiring specialized expertise.
 Building Capacity. Creating Impact

Factors Influencing Audit Impact Cont…

7. Stakeholder Expectations
•Investor Confidence: Audits play a critical role in providing assurance to
investors and other stakeholders.
•Public Trust: Maintaining public trust through transparent and thorough audits is
essential for the credibility of financial reporting.

8. Other Factors Include:

•Internal Factors:
• Selection of audit topics
• Auditor expertise and competence
• Auditor-auditee relationship
• Quality and relevance of audit reports
• Follow-up mechanisms and dissemination efforts
•External Factors:
• Influence of parliamentarians and media coverage
• Legislative enforcement powers and political agenda
Building Capacity. Creating Impact