In this episode of THE SAMPLE, Leita Hart-Fanta, CPA answers the question, “What is the purpose of a performance audit?”
Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.
In this episode, we answer the question, “What is the purpose of a performance audit?” In government, we can ask three questions about a program in general. Auditors can ask just about any question they want as long as they have some criteria to back it up, but I’ll tell you about that in a minute. One question is, “Did the program even work?” Another is, “Are we in compliance with laws, regulations, contracts, grant agreements?” And, “Are the financials accurate?”
Now the single audit, if you’re familiar with that, generally only deals with these two pieces down here. It has a compliance piece and a financial statement piece. We don’t really get to this question. That’s the role of a performance audit – to ask, “Is this even working?”
So here’s an example with the school lunch program. I love fish sticks. Aren’t they great? That was my favorite thing to come out of the school lunch room. I like them a little bit burnt actually. But this one says, “Did the program work?” This is a performance audit here, which is asking, “Are the lunches nutritious?” or “Are the children actually getting fed? And are they able to concentrate during class, and do better on their exams because we’re feeding them?” Not “Are the children eligible?” or “Are the financial reports sent to the grantor accurate?” Now technically, you can do a performance audit that sounds like the second question right here, but I’m not going to get into that granularity.
In general, when we talk about performance audits, we’re talking about this kind of question here. The federal government – the federal grantor community, the OMB – has decided, based on a presidential directive, to update the uniform guidance. And that is the rules and regulations that tell grantees what to do with federal money. I want you to notice this introductory paragraph to the changes to the Uniform Guidance as of August of 2020. Notice the OMB is asking, “You know what? Can we balance out our desire for compliance with actually looking at performance?” I like this last sentence right here: “Let’s focus on performance regarding programmatic results.”
So a performance audit asks that question that everybody wants to know: “Is this program actually working as intended?” As we all know, you can be in compliance, your financial statements could be accurate, but you could be doing something that really doesn’t work. One of the worst things that you can ever hear in government is, “We’ve always done it that way.” And a performance audit will evaluate, “Well, is that way you’re doing it actually the best for the citizens?”
An audit is an audit is an audit. If you have an auditor that can do one type of audit, they can do all types of audits. They can do a performance audit, a compliance audit, a financial audit. What makes audits differ is the subject matter that they’re examining, the criteria they’re using to evaluate that subject matter, the level of assurance (I’m not going to dig into that granularity on this video – I do have another video on that topic), and then the audit standards that they follow. Now, I’m not going to talk about these last two because I have other videos that talk about that. But I do want to talk about the subject matter and criteria to further refine our discussion of what a performance audit is.
So again, an audit is the evaluation of a subject matter against a criteria. And what is criteria? This is from a document called the Yellow Book, which is also known as Generally Accepted Government Auditing Standards. Actually, that’s its formal title and Yellow Book is the slang term. Let’s look at what criteria sounds like. It’s laws, regulations, contracts, grant agreements, standards, measures, expected performance, defined business practices, and benchmarks. Now notice that things get a little softer. The criteria gets a little less firm as you travel down this list, right? Laws. That’s pretty firm. Regulations. Contracts. And look all the way down here, we get to benchmarks, where we’re comparing our program to another program that someone else is running.
This is a little bit weaker, and that’s kind of where performance auditors tend to play, because financial auditors own financial statement audits and their criteria is GAAP. That stands for Generally Accepted Accounting Principles. Compliance auditors are using laws, regulations, contracts, policies. Performance auditors can end up struggling a little bit to find criteria, because they’re using benchmark standards and goals of the program.
So performance auditors, they’re asking that more interesting question, and a law may not cover it, and for sure GAAP is not going to cover, “Is this program working?” Probably a law is not going to cover that either, or a regulation. But if we could benchmark what we’re doing against another program, that could show us that the other program is effective, and maybe we aren’t. Or if there’s some kind of standard for performance or you have a goal – the entity you’re auditing has a goal to achieve something, like to serve this many customers, or to reduce the crime rate – that’s the kind of criteria a performance auditor works with. And it’s a little less firm.
This is the definition of what an audit objective is. I’m just going to show you this very quickly. Again, I have another video on this that digs into it more, but notice it’s saying that we have a subject matter, a performance aspect, and I want to talk to you about that for a second. (Won’t talk to you about that sentence.) “Questions about the program that auditors seek to answer based on evidence obtained and assessed against criteria.” So notice that two things I mentioned to you already are in this sentence, are in this paragraph. We have the subject matter assessed against a criteria. What I want to bring up for now is this concept right here of a performance aspect. So performance aspects are not criteria. They are something else. They are a quality of the subject matter.
Here are very common performance audit performance aspects. Is the program being run as economically as possible? Is it effective? Does it work? That’s the question I asked in my little hierarchy earlier in the video. Is it running efficiently? Is this program efficient? Now these words as you can imagine are problematic and that’s why I put them into the graveyard because it’s hard to find firm criteria to backup economical, effective, and efficient.
So what we have to do in the performance audit world, is we have to replace these words with words that are more specific. And then we can agree with the client, with the auditee, “What does efficient mean?” Does it mean that it’s timely? And then we define with the client what timely means. And again, we might use standards, we might use benchmarks. We need something more than just this word to go on, the word timely. We need criteria to back that up.
Now auditors often end up wanting to say something, they want to evaluate whether something is timely or reliable or accurate or complete, but there isn’t a law, regulation, contract, grant agreement. This is a very common situation. And so the IIA counsels auditors to develop criteria alongside the client. When there is none to work with, naturally it’s not there, don’t begin your project until you and the client agree on the criteria that you’re going to evaluate the program against. Very wise. So you can make it in the moment, but get the client to agree. Work with them.
So what is a performance audit again? A performance audit asks, I’m going to say more elevated questions about a program. Not just, “Are we in compliance?”, not just, “Are the financial statements accurate?”, but, “Does the program work?” It’s really interesting work. A little bit more challenging because of the criteria issue than a compliance audit or a financial statement audit, but it’s what we really want to know, isn’t it? We really want to know if the money that we’re spending on these programs is actually worth it.
That wraps it up for another episode of The Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me email@example.com and I’ll do my best to fill in the blanks. Thanks for playing.
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