1.1 Introduction
Research indicates that defining the VFM audit is a difficult task, similar to the differences between the VFM audit practice and the conceptual framework. The objective of this thesis does not concentrate on defining the VFM audit. However, this appendix analyses past research to summarise the conceptual framework of the VFM audit. The Audit Practice Statement issued by the VAGO (2009, p. 3) defines the VFM audit as follows:
A performance audit43 is an audit which evaluates whether an organization or government program is achieving its objectives effectively, economically and efficiently, and in compliance with all relevant legislation. Performance audits extend beyond the examination of the financial affairs and transactions of a government agency to encompass wider management issues of significance to the community.
Defining the VFM audit is a difficult task because the nature of audit practices continuously changes in parallel with the social and political environment. This matter is highlighted by Power (1997, p. 4), who refrains from defining auditing and the VFM audit because so many similar practices have been termed auditing, such as environmental auditing. The questionable nature of the definitions provided of the VFM audit is indicated in the definition given by the VAGO (1991a, p. 1 paragraph 6) in its first VPAM: ‘In broad terms, a “performance audit” may be defined as an audit relating to any matters concerning the performance of an organisation other than those connected with the fair presentation of financial statements’. This definition could be interpreted to refer to any non-financial audit conducted by the VAGO as a VFM or performance audit.
The remainder of this appendix is set out as follows. Section 1.2 of this appendix discusses the evolution of the VFM audit concept, and Section 1.3 provides the summary and conclusions.
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1.2 Evolution of the VFM Audit Conceptual Framework
Lindeberg (2007) analyses texts in auditing and evaluation practices to determine whether auditing is distinct from other evaluation practices. He compares the VFM or performance audit with financial audit and program evaluation in order to explore his research objectives. Lindeberg (2007, p. 338) identifies the VFM audit or performance auditing as follows:
Performance auditing is not a prototypical form of auditing that we would expect to fit neatly into the category ‘audit’. Rather, performance auditing appears to be the oddball in the auditing family and it is therefore likely that we will be able to observe problems of classification.
Lindeberg (2007) argues that the financial audit and performance audit have different characteristics, but points out that performance auditing and program evaluation have similar characteristics. He also highlights that the financial audit, performance audit and program evaluation sit in three different places on a horizontal continuum. He concludes that performance auditing and program evaluation are much more similar than the financial audit. The deficiency in this research is that Lindeberg did not compare the audit mandate and the independence of the person who is completing the performance audit or financial audit. In that regard, the financial audit and performance audit are much more similar, as these two functions are completed by an officer independent of the Parliament or legislative assembly.44
A particularly confusing aspect of VFM auditing is that so many different terms have been used, and it is unclear whether these terms represent something different or all describe essentially the same thing. In his review of VFM audit practices in the UK, Canada, Australia, New Zealand, the US and Sweden, Glynn (1985) uses the general term ‘VFM auditing’ to encompass the range of practices and terminologies that he describes. Glenn states that, from 1979, the federal Australian Auditor-General had a mandate for efficiency audits, but not effectiveness reviews. However, there were significant variations among the
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states, with the State of Victoria initiating pilot effectiveness audits modelled on the Canadian comprehensive auditing approach (Glynn 1985, p. 119). According to Glynn, the other Australian state jurisdictions were less developed in this area. The New Zealand Auditor-General had the authority to conduct VFM audits from 1977, and had been experimenting with efficiency and effectiveness reviews based on a comprehensive auditing model since 1975. In that case, comprehensive auditing indicates that—in addition to the financial audits—the Auditor-General also evaluates the adequacy of systems and controls in establishing efficiency and effectiveness, and whether funds had been used in an effective and efficient manner.
Within the US, the GAO stressed the importance of independent reviews of efficiency and effectiveness or ‘program results reviews’ (Glynn 1985, p. 123). These reviews focused on questions of the economy and efficiency of management practices, and the effectiveness of programs in achieving desired results. Together with the term ‘program results reviews’, the terms ‘performance audit’ and ‘comprehensive audits’ were also used. In contrast, Sweden used the term ‘effectiveness auditing’. The effectiveness audit functioned as an extension of existing practices of financial auditing into evaluating the adequacy of the internal controls. The effectiveness audit was intended to check that activities were conducted in a functional, systematic and economically satisfactory way. Glynn (1985, p. 126) observes that the term ‘value for money’ was now part of the vocabulary of many countries. While there was no standard approach to the practice of VFM auditing, there was general agreement regarding the centrality of the themes of efficiency, economy and effectiveness.
Parker (1986) reviews the literature and practice of VFM auditing for the Australian Accounting Research Foundation. He highlights that, while terms such as VFM, operations and operational audit, performance audit and management audit have been variously employed in theory and practice, the evidence in his study clearly points to their sharing a common basic definition founded on the concepts of economy, efficiency and effectiveness. Drawing from this, Parker (1986, p. 61) argues that a VFM audit is any audit
that attempts to evaluate organisational performance based on the three criteria of economy, efficiency and effectiveness. Parker (1986, p. 61) defines these criteria as follows:
economy is the acquisition of human and material resources of appropriate quality and quantity at the lowest reasonable cost
efficiency is using a given set of resources to maximise associated outputs at minimum total cost, or using minimum input resources for a predetermined level of output
effectiveness is the degree to which predetermined entity objectives for a particular activity or program are achieved.
1.3 Summary and Conclusions
From the work of Glynn (1985) and Parker (1986), it seems clear that, while different terms are used across different countries (and sometimes within the same country), VFM auditing is an acceptable general term. All these different practices are centrally concerned with evaluating the economy, efficiency and effectiveness of State Government practices and the use of taxpayers’ funds. However, while the concepts and core focus have similarities, it is also clear that a range of different practices have been used to assess and evaluate the questions of economy, efficiency and effectiveness. It is already evident that there could be clear distinctions between the practice of VFM auditing within the Australian federal jurisdiction and the State of Victoria (Glynn 1985). The VAGO examines the economy, efficiency, effectiveness and compliance with all relevant legislation within the scope of the VFM audit in State Government organisations and programs.