Performance Auditing: Adding Value Through Independent Evaluation

1. Performance auditing – adding value Presented by Deon van der Westhuizen

2. Please indicate • How many did performance audits before? • As external auditors? • As Internal Auditors? • How many applied COSO before? • How many audited the governance process before?

3. Public sector failures • Public sector authorities mismanaged • Power failures in South Africa • Power failures in Pakistan • Poverty • Unemployment • Financial crisis • Fraud and corruption

4. Private sector indicators • Financial pressures: • Financial institutions • Retail companies • Manufacturing companies • Disciplining/ terminating contracts of senior management • Continuous focus - values and ethics

5. Internal audit (IIA) Independent Objective Assurance Consulting Activity Add Value Improve Operations Evaluate and improve the effectiveness of risk management, control and governance processes.

6. Performance auditing is an independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilized efficiently and effectively, and to report on the results

8. Indicators of Economy, Efficiency, Effectiveness and Equity

11. COSO – tool to measure effectiveness Control Activities • Policies that ensure management directives are carried out • Approval and authorizations, verifications, evaluations, safeguarding assets security and segregation of duties Monitoring • Assess control system performance over time • Ongoing and separate evaluations • Management and supervisory activities Information and Communication • Relevant information identified, captured and communicated timely • Access to internal and externally generated information • Information flow allows for management action Risk Assessment • Identify and analyze relevant risks to achieving the entity’s objectives Control Environment • Sets “tone at the top” • Foundation for all other components of control • Integrity, ethical values, competence, authority, responsibility

12. COSO control framework

14. Performance auditing is an independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilized efficiently and effectively, and to report on the results

17. Auditor’s role

20. Performance auditing is an independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilized efficiently and effectively, and to report on the results

21. Measures • Policies • Planning • Organization • Coordination • Monitoring/reporting • Evaluation

22. Governance – policies Objective COSO – control environment Policies, laws, etc.

23. Governance – planning Objective Policies, laws, etc. Strategic/operational Plans (SMART/CQQT)

24. SMART Resources • Money • Staff • Skills • Assets • IT • Specific • Measurable • Achievable • Realistic …… Resources • Timelines No resources -no service delivery

25. CQQT • All about setting • cost, • quantity, • quality • time • Place • standards during the planning phases

26. Planning budgeting and reporting

27. Capital budgeting • Substantial expenses • Benefits do not flow over one year, over long time • Projection of expenses and benefits difficult • Outcomes versus outputs • Actual expenses often significantly different from planned expenses

28. Capital budgeting • Capital outlay • Working capital • Cash inflows • ……..over time • Tax shields • Present value factors

29. Standard costing • Raw materials • Quantity standards – cost effectiveness • Price standards – cost effectiveness • Direct labor • Time standards – efficiency • Rate standards – cost effectiveness

30. Break even analysis • Selling prices • Variable costs • Contribution margins • Fixed costs • Profit • Breakeven

31. Break Even Analysis Costs/Revenue TR TC VC FC Q1 Output/Sales

32. Governance – organization Objective Organogram: Deep structures Flat Structures Matrix structures Strategic/operational Plans (SMART/CQQT) Capability – organogram, finance & human HR: Ethics Warm bodies Skills

33. Governance - coordination Objective Strategic/operational Plans (SMART/CQQT) Performance agreements: Job descriptions Deliverable standards Balances scorecards Capability – organogram, finance & human Responsibility/ accountability

34. Governance – monitoring – process level Objective • Dashboard • Balanced scorecard • Performance reporting • Governance • Monitoring and evaluation Strategic/operational Plans (SMART/CQQT) Capability – organogram, finance & human Key measurable objectives and indicators

35. Dashboard

36. Key Performance Information Concepts

37. Indicators of Economy, Efficiency, Effectiveness and Equity(FMPPI – p7)

38. Types of indicators • Cost or price indicators • Distribution indicators • Quantity indicators • Quality indicators • Dates and time frame indicators • Adequacy indicators • Accessibility indicators

39. Specific focus • Economy indicators – cost/benefit • Efficiency indicators – minimum input, maximum output • Effectiveness indicators – achieving the goals and objectives • Equity indicators – services provided impartially, fairly and equitably

40. Performance targets • Baselines • Performance targets • Performance standards • Criteria • Specific • Measurable • Achievable • Relevant ---------- Resources • Time-bound

41. Developing Performance Indicators • Step 1: Agree on what you are aiming to achieve • Step 2: Specify the outputs, activities and inputs • Step 3: Select the most important indicators • Step 4: Select realistic performance targets • Step 5: Determine the process and format of reporting performance • Step 6: Establish processes and mechanisms to facilitate corrective action

42. Managing Performance Information • Responsibilities: - Executive authorities - Accounting officers - Line managers and other officials

43. Integrated Performance Information Structures • Well designed documentation • Appropriate capacity to manage performance information • Appropriate systems to collect, verify and store information • Consultation process to include all needs • Process to ensure information is used for planning, budgeting and management • Processes to ensure responsibility is assigned • Identified set of performance indicators for oversight

44. David Parmenter • For years organizations used what they thought were KPIs, but measures have not had the impact their management were seeking. • KPIs are mislabeled and misused. Organizations with more than 20 KPIs lack focus, alignment and underachieve. • Organization typically has fewer than 10 true KPIs, and these are measured and reported 24/7, daily or, at the outer limit, weekly.

45. Characteristics of KPI’s • Non-financial measurement - When you put a currency sign to a measure you have not dug deep enough • Frequent measurement (daily or 24/7) • Acted upon by the CEO/AO • Staff understanding measure and corrective action • Responsibility tied to individual or team • A significant affect on organization • Positive movements affects all other performance measures in positive way

46. Governance – monitoring – process level Objective Management information systems Strategic/operational Plans (SMART/CQQT) Capability – organogram, finance & human Key measurable objectives and indicators

47. MIS - automation

48. Governance – reporting Objective Management information systems Strategic/operational Plans (SMART/CQQT) Capability – organogram, finance & human Key measurable objectives and indicators Exception reports

49. Governance – evaluation Objective Management information systems Strategic/operational Plans (SMART/CQQT) Capability – organogram, finance & human Key measurable objectives and indicators Exception reports

50. Governance - people level Objective Strategic/operational Plans (SMART/CQQT) Process Key measurable objectives and indicators Management information systems Capability – organogram, finance & human Exception reports Responsibility/ accountability Performance measurement People