RECENT DEVELOPMENTS IN PUBLIC SECTOR AND ROLE OF INTERNAL AUDITOR

_____________________________________________________________By

Muhammad Akram KhanFormer Deputy Auditor General of Pakistan

Makram1000@gmail.com

1. Introduction

Internal auditing has always been a concern of the governments since ancient times. The rulers have been concerned about the implementation of policies, leakage of funds and economy in expenditure. However, internal auditing as a separate function and as an independent profession is a story of only recent past. It all started with the establishment of Institute of Internal Auditors (IIA) in USA in 1941. In 1947, the IIA issued a statement of responsibilities of internal auditors. At that time, internal auditing was considered an extension of accounting work, a sort of independent internal checking. By 1957, the internal audit became relevant to non-accounting matters also. But a real breakthrough came in 1971. The internal auditor’s role was perceived principally with relations to all the operations of the organization, accounting function being one of them. In 1981, the IIA redefined the internal audit function as a service to the organization. It was a bold departure from the earlier definition, which conceived internal audit as a service to management. The revised definition put the interests of the organizations as of prime concern for internal auditors. It meant that the internal auditors were more interested in promoting the interests of the organization and than that of the management, conceding implicitly that there could be occasions when the two may be in conflict. In 1991, the IIA made several changes in the responsibilities of the internal auditor. The most significant was the emphasis on his independence, compliance with the IIA professional standards and adherence to the IIA code of ethics. In June 1999, IIA approved a new definition of “Internal Auditing” which says

“ Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process”.

The new definition of internal auditing represented a shift from a narrower role of control and appraisal to encompass a broader role that would process improvement framed against achievement of organizational objectives.1 The scope of internal auditing now embraces wider concepts of corporate governance: risk and control - recognizing that 1 Krogstad, Jack L., Ridley, Anthony J., and Rittenlerg, Larry E, , “ Where We’re Going”, Internal Auditor, Altamonte Springs, Oct 1999, pp.26-33

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control exists within an organization basically to manage risk and promote effective governance2. The most significant change is that the internal auditors are expected to change their mindset: from a faultfinder to an advisor. The internal auditors should treat the auditee as its customer. As with a customer, the internal auditor should clearly communicate with the auditee, involve management in the audit planning process, consider organizational risks are potential areas of audit concern, work with managers to find acceptable solutions, discuss findings before formally reporting and seek suggestions from the auditee for the improvement of audit practice. Some organizations have started using internal audit as a training ground for their potential manager as it provides a bird’s eye view of the entire organization. The internal auditing has become a profession on its own right with a body of knowledge, qualification for expertise, code of ethics, independent career progression and a system of quality assurance.

Most of the development in the internal auditing has taken place in the private sector. However, the public sector has also started realizing the importance of this function. The public sector has seen several waves of thought. Soon after the World War II, the rebuilding of war torn economies and developing the de-colonized countries became the most important priority. Everyone was enthusiastic about planning, import substitution and fixed exchange rate. The theory worked well for a few years when it started showing constraints. The challenge of socialism and the cold war concerns gave birth to large-scale nationalizations around the globe. The size of government started bulging. The public sector became quite large. This gave birth to the realization that public sector must perform in an environment of economy, efficiency and effectiveness. Demands for performance measurement, and value for money became prominent. Not satisfied with appropriate framework for performance measurement and value for money auditing, the concerns about the efficiency of the public sector remained vexing until a wave of privatization engulfed the entire world. The privatization led to demands for proper regulation of the newly emerging privatized enterprises. Along with this came a whole host of concerns for good governance, transparency and accountability of the public sector.

These developments in the public sector influenced the role of external and internal audit. In this paper we aim to discuss the implications of the recent developments in the public sector for the role of internal audit. We shall summarize the main currents of change in the public sector around the globe. However, we shall also refer to conditions in Pakistan to illustrate our point. Along the way, we shall discuss the implications of these changes for internal auditing. This would cover issues relating to scope of internal audit, knowledge requirements, and competencies for internal audit. At the end, we shall conclude with some remarks for future of this profession in a country like Pakistan and what should the emerging institute of internal auditors in Pakistan be doing.

2. Separation of Auditing and Accounting in the Government

One of the landmark developments in the public sector is the promulgation of Auditor-General’s (Functions, Powers and Terms and Conditions of Service) Ordinance 2001 and

2 Benchmarking the Internal Audit Function, Canberra, Australia: ANAO, 2000, PP-20

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Controller General of Accounts (Appointment, Functions and Powers) Ordinance 2001. The most important effect of these laws is that accounting and auditing, which had been under the control of the Auditor General since 1858, when this office was first established in India, have been separated. There had been a move for separation of these functions for the last few decades. The process started in sixties with the establishment of departmentalized account offices in a few ministries. After that, there was period of lull. However, in early nineties when the Auditor General office started modernizing itself with the help of World Bank funding, the pressure started mounting from the World Bank to separate these functions. The idea was to develop a fully independent but strong Supreme Auditing Institution, removing all possibilities of conflict of interest. Ultimately, this has been achieved and the Auditor General office is now well under its rout to modernization.

One of the segments of the total reform program is that the government would establish a proper internal audit function in the federal, provincial and local governments. The Auditor General will play the leadership role in developing the following infrastructure:

A strategy for the introduction of internal audit function at all levels of the government and in public sector corporations.

A draft law for internal audit function An internal audit manual Training of auditors in internal auditing

The Auditor General office has already contracted a multi-national company to develop these instruments. The deadline for this groundwork is December 2002.

These developments have far-reaching implications for internal auditors and internal auditing profession. It is clear that a large number of professional internal auditors would be required to man the function at all levels of the government. There would be requirement of massive training of the existing auditors working in the public sector along with training and education of new entrants in the field. In this perspective, the establishment of Pakistan chapter of IIA is quite timely.

3. Devolution of Powers and District Governments

One of the significant changes in the public sector of Pakistan is the devolution of powers to the district levels and empowerment of local bodies. The idea is that the district governments perform all local bodies functions independently. These governments, in turn, should then be accountable for their policies, plans and actions. This would be a new experience for Pakistan. There is no precedence for the model being tried. In such a situation the level of risk is usually quite high. The accounting procedures and internal controls have to be defined properly. The district government would require standard operating procedures, accounting and auditing manuals. The lines of accountability and flows of information have to be defined clearly. Staff would require training.

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At present there is no system of internal auditing at the district level. Most probably it will take another couple of years before this function is introduced at district level. By then some form of accounting and auditing would have established. But the internal auditors would have a busy schedule. They would need to establish routine procedures, develop reporting formats, and arrange human and financial resource for their function.

The IIA Pakistan chapter would need to work closely with the government and the Auditor General office for developing the entire infrastructure for all levels of the government. It would be appropriate if arrangement for training of internal auditors are planned and kept in place on a timely basis. Qualification, curricula, training material, and teaching faculty, all will have to be developed in a short span of time.

4. Performance Auditing

The performance audit in Pakistan, like in some other countries, became the domain of SAIs. The emphasis of the SAIs was on better accountability. With hindsight we can now say that the role of SAIs of Pakistan in promoting and practice of performance auditing has not been that encouraging. It seems that the performance auditing should be more appropriate a function of internal auditors as compared to external auditors. For understanding this position, it is necessary to have a look on the development and experience of performance auditing in the context of Pakistan.

One of the major changes that the public sector saw during the last quarter of century was a wave of performance auditing. It started in the early seventies from developed countries with greater demand for accountability of the public sector. The demand came from the legislatures asking difficult questions: what happened to the public money in terms of promised benefits? Did we get value for money? Were the public funds used with due regard for economy, efficiency and effectiveness? Soon performance auditing became a buzzword and most of the SAIs around the globe started following the practice. Training programs, methodology development, operating procedures and field implementation started. In all respects, performance auditing became a going concern by the end of eighties.

In Pakistan also we started with performance evaluation of public enterprises in the closing years of seventies. The initiative came from the government, which caught the Auditor General office unaware. However, with Dutch technical assistance the Auditor General office was able to develop a reasonably good methodology and also undertook performance evaluation of a number of public enterprises. The effort was appreciated all around. There were some kind remarks from the Public Accounts Committee also. The Auditor General office rightfully felt proud about it.

Encouraged by this quick success and influenced by the worldwide demand for this new trade, the Auditor General office requested for yet another installment of Dutch assistance, which came readily. The second Dutch technical assistance was spread over a decade or so. During this time span, a lot of useful work was done. A series of guidelines,

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an encyclopedic work by its own right, came into being. Hundreds of auditors got training and tested the methodology in the field. The Auditor General reorganized his department to create room for performance audit of development projects. This was over and above an organization that was evaluating the performance of public enterprises.

The whole experience spans over 15 years now. It is time to look back and see as to how was the experience. Despite the fact that the Auditor General carried out hundreds of performance audits, it could not create an impact. The performance audit reports are not all that popular with the Public Accounts Committee. The executive departments are least concerned about them. In fact, if you ask any auditee about conventional audit and performance audit, they would feel deterred by conventional audit and would hardly care for findings of the performance audit. The auditors also feel extremely constrained and dejected about performance auditing as they think, it does not carry any punch. The reasons for this ‘insignificance’ of performance auditing in Pakistan are as follows:

The performance auditing in Pakistan started at the initiative of the Auditor General. The legislature or the executive government never felt its need. When ultimately the Auditor General produced some performance audit reports the attitude was that of indifference both at the executive as well as legislature level. Nobody stopped the Auditor General from doing it while none was enthused about it also. The idea of performance audit remained an exotic plant, which did not take root in an alien land.

Since the government was not enthusiastic about performance auditing, it did not oblige the Auditor General with necessary resources. As a result, it remained a starved function, with Auditor General looking up to the Finance Division for resources and never getting what it required.

The Public Accounts Committee also felt uninterested, as the performance audit reports did not have the punch. They lacked the ‘pleasure’ of horror stories. There was no ‘fun’ in them.

The performance audit reports of the Auditor General focused mainly on the cost over-runs and time over-runs. These observations entailed wastage and inefficiency. However, the executive departments found a corrective measure. In almost all cases, the projects suffering from cost over-runs or time over runs would be revised and their PC-I would be approved as of actual data, leaving nothing for which an executive agency would be accountable. Thus all executive agencies, up to ECNEC, colluded in covering up the waste and inefficiency. The accountability part of performance audit reports was thus blunted.

The other benefit of performance audit reports could be learning of lessons for the future. However, because of lack of any interest in the audit reports, there was no thinking on how to make use of the audit reports. There does not exist any institutional mechanism to feed back the lessons

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learnt from past projects and programs. The result is project after project suffers from same inadequacies and commits similar mistakes without ever getting wiser. Thus the other benefit of performance audit, which could accrue to the nation in the form of good advice, was also lost.

In this perspective I see a role for the internal auditor. If the performance auditing is taken up as a function of internal audit, there is a likelihood that the benefits of this audit to the extent of better advice could start flowing to the organization. The reason is that in this case, the initiative would come from the Principal Accounting Officer or Chief Executive Officer of the organization. In such a situation, they would also like to benefit from performance audit. The experience of performance auditing by the Auditor General has not borne fruit in the case of Pakistan. The whole exercise was jeopardized due to ownership problem. The concept is powerful and has a lot of potential. Many countries in the world have benefited from it. We have not. May be we can make use of it if it is adopted as an internal audit function.

5. Good Governance in the Public Sector

One of the emerging trends is demand for good governance in the public sector. Good governance refers, broadly speaking, to the ‘rule of law’. However, it has some details. Citizens demand openness and transparency in all matters. They expect equity, fairness and objectivity in decision-making. The public servants are supposed to act in an ethical manner and ensure appropriate quality of service. In this regard the minimum standards of behavior for public servants are as follows:

The public servants should perform their functions in an impartial and professional manner.

The public servants should adhere to the highest standards of ethics. The public servants should deliver services fairly, effectively, impartially

and courteously. The public servants should achieve results and manage risk properly.

These expectations have a direct impact on the role of internal auditors. They are no more required to look into internal controls and compliance with the policies only. Of course, that role would remain intact. However, much more than this traditional role, the internal auditors are expected to report on the extent to which the organization performed in the overall framework of good governance. In other words, the role of internal auditor is shifting more toward ‘performance’ away from ‘conformance’ or ‘compliance’.

6. Role of Audit Committees

There is a growing convergence of public and private sector. Both the sectors are getting closer to each other in several matters. One of these is the need for audit committees in the public sector that has come from the success of this concept in the private sector. Audit committees in the private sector have played a crucial role in ensuring

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independence of internal audit and compliance of audit recommendations. It is being professed that the public sector should also adopt the concept of audit committees.

Audit committees in the private sector consist of independent non-executive shareholders. Their main responsibility is to ensure that the auditors (both internal as well external) get uninterrupted access to information; the audit plans are comprehensive; the auditors have direct access to them and their audit recommendations are followed. Besides, the audit committees also oversee the quality of internal audit work. They ensure that the internal auditors follow professional standards, have the right type of expertise, cover all significant areas of operations, and adopt the code of ethics expected of them.

In the public sector the concept of audit committees have not yet taken roots. A rudimentary form of audit committee exists in the name of ‘Departmental Audit Committee”. The purpose of this committee is to bring the observations of Auditor General’s auditors to notice of the Principal Accounting Officer. Thus it is a lower level of forum to settle some of the audit observations before the Auditor General reports the audit findings to the Public Accounts Committee. The concept of independent audit committee for public sector is broader than this.

Once the idea is accepted, all ministries and departments and public sector organizations will have a formally constituted audit committees with members from public as well as public service. These committees would have a dual role. Primarily, they would oversee the work of internal auditors. At present there are only a few organizations in the public sector that have a proper internal audit function. The reports of internal audits do not receive adequate attention. There is also no independent check on the quality and performance of internal auditors. Independent audit committees would oversee the work of internal audit. They would ensure that the internal auditors have adequate resources to perform their functions. For that purpose, these committees would approve their budget. The committees would approve the internal audit plans. The internal audit reports would be submitted to the audit committees. The committees would be able to hold private sessions with internal auditors in which the executive agency representatives do not sit. The committees would require the Chief Executive Officers to report compliance of audit reports to them. Thus a sort of Public Accounts Committee at the level of each ministry and department would come into being. It would strengthen the accountability mechanism. The secondary role of these committees would be review compliance of the Auditor General’s reports and to help the Public Accounts Committee concentrate only on significant matters. The present backlog of audit reports where thousands of observations are waiting to be examined by the Public Accounts Committees would be reduced when independent audit committees come into being for all departments and ministries.

The idea of independent audit committees would not be easily digested by the executive agencies. It contains a hidden threat to them. Therefore, the auditors would have to do some marketing effort to make the idea palatable for the executive agencies.

7. Public-Private Partnership

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One of the recent developments in the public sector is collaboration of the two sectors in several ways. The idea to involve the private sector in provision of goods and services emanates from the theory of greater efficiency in the private sector. The public-private partnership can take any one or combination of the following arrangements;

Use of a diverse range of mechanisms for delivery of public services Private sector finance for building infrastructure, property development,

information technology, etc Partnership between public sector and private sector and between public

sector and voluntary organizations Establishment of companies by public sector to undertake a variety of

public services

Whatever the arrangement, citizens expect a seamless delivery of services. They would not like to know who is doing what so far as delivery is of right quality and at right price. Some of the implications of this development are as follows:

To come true to these expectations, the executive agencies have a responsibility to ensure that the private sector agencies fulfill their contractual obligations. Implicitly, it assumes that the public and private sector agencies would enter into elaborate arrangements for sharing information with each other.

The option of contracting private finance for provision of infrastructure and other long-term assets requires new skills on the part of public sector employees. They have to ensure that the projects add value, are rightly priced, would be able to deliver on time and would not be more costly than if funded by the public sector itself.

The public-private partnership requires additional skills in assessing the risks involved. At present there are no guidelines for public sector employees in assessing these risks. The objective of involving the private sector is to make it share some of the risk. An arrangement in which the private sector shares no risk or shares a minimal risk would be pointless, as it would only mean providing a stream of risk-free income to the private sector.

The arrangement also requires contract management skills. The public sector employees should be expert in drafting and articulating contracts so that accountability and service delivery concerns are built into the contract from the very outset. It saves considerable time, cost and effort later in the contract management.

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The public sector employees need to understand that private sector can be made responsible for delivery of goods and services but accountability cannot be outsourced.

Public-private sector partnership also raises privacy concerns of citizens and security of the data collected by private agencies. It is important the contracts with the private sector take care of these concerns in the first instance.

Another question is about the length of the contractual obligation. While it is important that the private sector has a reasonably stable period for carrying out its obligation and for making investment, it should also not unnecessarily jeopardize the freedom of the future governments to undertake policy changes. Therefore, while contracting with the private sector the length of period should be considered carefully.

The public –private partnership arrangements are yet developing. It is not still not clear to which extent the private sector can be held accountable for non-performance and where the accountability of the public sector starts. For example, if the private sector contract fails to perform, should we consider the federal secretary or the minister accountable? Clear guidelines on the subject are not yet available.

A related issue is the right of internal auditors to have access to the records of the contractors. The private parties would often avoid such an access on the plea that the information is ‘confidential’ and ‘commercial’. There are no clear guidelines on the subject.

There is a growing demand from the citizens that the public sector should issue their service charters, committing publicly about the quality of service. The public sector is not quite enthusiastic about such demands. With the passage of time, such demands would become a reality. In the case of contracting out, the public sector can provide adherence to the service charter by the private sector.

In this emerging scenario, the job of internal auditor is getting complicated. He has to remain involved in all stages of dealings with the private sector and give his input. At later stages, the auditors would be required to report on performance of the private sector partners. These audits would require access to private sector records, to which we have already referred. The public sector agencies would need to support the internal auditors for having the necessary access.

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The auditors would learn new skills relating to contract auditing and get some lessons in law.

8. Public Money

The definition of public money has undergone a change. Traditionally, public money referred to taxes and loans contracted by the government as well as income generated by public bodies as fees and charges. The concept also applied to public expenditure as authorized by the legislature. This definition has undergone a change with the passage of time and recently there has been a vast expansion in the concept of public money. Now there are a large number of public bodies, which raise and spend public money. Public bodies consist of government departments, non-department public bodies, public corporations, and local bodies. Many public bodies receive funds or otherwise handle funds received from private sources. For example, Pakistan Baitulmal receives donations from private sources. The money received in this manner is also used to perform public functions.

There are independent private or voluntary organization (NGOs), which receive grants-in-aid from the government or donations from the public for performing public functions. This money should also be considered as public money. Similarly, there are organizations, which fund all of their functions by donations from the public and perform such functions as are normally the domain of the government, like education or health care for the public. These funds should also be considered as public money.

The expansion in the definition of public money has led to greater demand of accountability for these funds. It can be argued that demand for public accountability of funds handled by private, or voluntary organizations is uncalled for, as the government has nothing to do with these organizations. It would be too intrusive for the government to hold these organizations accountable. The answer is that these organizations receive grants-in-aid from the government to perform certain functions for the benefit of the public. Similarly, they collect money from public in the same name. The public thus has a legitimate expectation to hold such organizations accountable to the extent of public funds. The question remains: when does public money become private money? The answer is: where public money is transferred to an individual or to an organization in return for goods or services, it ceases to be public money on such transfer. However, where public money is transferred to an organization for providing certain services or functions for the benefit of the public, the public money retains its character and public has an interest to know about its final outcome. Similarly, all funds collected or received by any body, public or private, under a statutory authority or as donations with the aim of providing public service remains accountable as recipient of the public money. There are some implications for the internal auditors due to this expansion in the definition of public money. The internal auditors in these organizations have a dual role. They need to perform their routine auditing functions. At the same time they have to keep the angle of public accountability in view. Internal auditors while auditing public money would need to see that the purpose for which the money became available was fulfilled or

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not. Similarly, they would also see that the organization receiving public money had due authority for receiving the money. The idea is that the internal auditors have a primary role to be of service to the organization. They should see that the organizational objectives are being met or not. Being internal auditors of such organizations, even though these are private, voluntary or non-government organizations, they need to keep the public accountability dimension in view while performing their functions. This would help these organizations remain in a state of readiness for facing the external auditors, especially the Auditor General office.

9. Democratization of Government Business

Democracy evolved as a political ideology and has taken roots as such. However, this powerful concept is now spreading to other walks of life. For centuries, the government has been the domain of rulers until democracy provided a voice to the people through their representatives. Despite that, the detailed business of the government remained the prerogative of the bureaucrats. There was a large area of governance, which the bureaucracy handled within the broader legal framework in the name of rules, and regulations. Gradually, it has been accepted that the people should have a voice in rule-making also. This is a recent development in public administration.

With the onset of privatization and liberalization, the regulatory bodies have become quite fashionable. The theory of regulatory bodies involves taking all the stakeholders into confidence while making regulations in a particular area. The consultation with stakeholders takes several forms like issue of consultation papers, holding of public forums, bilateral and multilateral meetings, sharing of proposed regulations through Internet and publication of all past decisions. The regulatory bodies are also subject to certain oversight system and remain accountable for their decisions. All this has set a new type of governance pattern. Imagine the days when the bureaucrats would take decisions and communicate to the concerned parties without even an explanation. From that scenario to the present scenario where all decisions have to be made in consultation with the stakeholders and all information has to be shared with them, public administration has covered a wide area. .

The internal auditors cannot remain aloof from these developments. The emerging pattern of internal audit seems to be where they would also comment if standard procedures and due process of decision-making were followed by the organization. In other words, the internal auditors would safeguard the public interest by reporting on due process of decision-making.

10. Sharing of Information

Another development in the public sector pertains to concept of information sharing by public sector organizations with the citizens. The maxim used to be: ignorance of law is no excuse. Gradually this maxim is giving way to the theory that ignorance of law can be an excuse if the public body responsible for disseminating the information has not done

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so adequately. It means the onus to provide information is shifting on to the public bodies. The right of the citizens to receive information is being established. There is a demand that the citizens should be able to have access to official files and notes of the public servants indicating how a particular decision was taken. This is being pleaded in the name of greater transparency. The bureaucracy has not yet yielded to this public demand. However, this is not very far. Soon the bureaucracy would have to surrender this privilege also. They will have to come out of their ivory towers and make the information available to interested parties. The developments in information technology have only triggered this demand. The public sector bodies are now expected to have their web sites where all information is available. Similarly, there is demand that all public sector bodies have some form of complaint handling mechanism in place.

All these developments are exposing the public servants to demands of accountability. The internal auditors will have to expand their scope of work. Gradually they would be required to report on such questions: Did the organization provide information to all concerned on all-important matters in a prompt and easy-to-understand manner? Did the organization have well-functioning complaint-handling mechanism? Did the organization respond to information request from citizens on a timely manner? Obviously, these developments are a wide departure from the traditional role of auditors.

11. Effect of IT Developments

The developments in information are rapidly changing the way government had been run in the past. Internet is fast becoming an everyday facility. There is a thirst for more and more information from the citizens. Besides, the concepts of e-business and e-government are taking roots. The governments are busy in developing cyber laws. Most of the business in public bodies is shifting to computers. There are all sorts of questions relating to information systems security.

In this scenario, the job of internal auditor is also undergoing a change. He has to learn information technology. The textbooks on internal auditing till late nineties had been stressing that the internal auditors should learn to use computer for auditing, analytical work and reporting. These ideas were quite fashionable only a few years ago. They seem outdated today. The developments in information technology have also posed new challenge and provided new opportunities to the internal auditors It seems that the internal auditors should now be conversant with the following:

They should have access to Internet sources on auditing. They should be able to communicate on-line with other auditors globally

on real-life problems in their professional work. They should be able to share all innovative work done by them and make

use of the similar work done by others. They should be able to make use of information technology in their day-

to-day work.. They should learn cyber laws.

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They should be able to understand mechanics of computer frauds and develop efficient and effective system to prevent and detect such frauds.

They should be able to carry out audit in real time. It would be possible in near future for internal auditors to have access to the on-line data of the Auditee to conduct audit in real time. The whole approach to auditing would undergo a drastic change. There would be no issues relating to sampling and extrapolation. There will be no lengthy reports and no frustrations relating to non-compliance with the audit observations.

Information technology is changing the procedures of audit supervision. It is becoming easy for supervisors to have access to the working papers of their subordinates while the audit is going on. They can give advice to them without moving out of their offices.

Internal auditors are using information technology to enhance their productivity. For example, they are using it to update multi-year plans, give field auditors an on-line access to audit manuals and guidance, prepare audit working papers and audit programs online and seek headquarters approval while remaining in the field.

In countries like Pakistan, the IT developments have posed an especially complex challenge. The internal auditors can come across organizations whether segments of the operations are automated, semi-automated and rest being performed manually. The auditors would need to audit all three types of operations. They can adopted simple-cut computerized audit techniques. They would need to blend manual and computerized procedures.

12. Frauds and Corruption Another area of public administration that has wide-ranging implications for internal auditors is corruption and fraud in the public sector. The fraud has been dealt with and discussed in the literature on internal auditing quite extensively. However, auditors have always taken the position that it is the management, which should install adequate systems to prevent fraud. The auditors, if they suspect fraud, should investigate it. If they do not suspect it, they need not undertake any special procedures. This thinking is undergoing change. It is growingly felt that the auditors have been shirking their primary responsibility of protecting the interest of the stakeholders against fraud. Therefore, they should play a more proactive role in preventing and detecting fraud. This thinking is going to change the scope of work of the internal auditors. The auditors would have to plan audits against possibilities of fraud. It would increase scope of their routine audits.

Regarding corruption, the auditors have a real difficulty. Corruption often takes the form of bribes, gifts, and kickbacks. There is often no telltale to prove beyond doubt that corruption has taken place. The best auditors have been able to think about this issue is to embark into the arena of performance auditing. The line of argument is as follows. In a project, program or contract, if the cost and time taken is excessively

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high or the quality of output is remarkably low, there is a likelihood of corruption, besides other possibilities such as negligence or inefficiency. Obviously, this does not help in minimizing the corruption. This is definitely a difficult situation. In a recent paper we have argued that the auditors should carry out Corruption Opportunity Tests to determine if the likelihood of corruption exists3. If this approach is followed, then the internal auditors would be able to point out areas in the operational procedures, rules and regulation that provide avenues for corruption. The auditors would then have to do some work in persuading the operational management to minimize these opportunities. For such an approach, legal support from the government is necessary, failing which the executive authorities would not be interested in undertaking such an exercise.

13. Measuring the Performance of Internal Audit One of the latest trends in internal audit is a near consensus among the internal auditors that their own performance should also be as much subject to economy, efficiency and effectiveness as those of the auditee. Although it is difficult to quantify such things as value of audit recommendations for improving internal controls, deterrent effect of audit, effect of audit advice on organization’s policies and thus performance and the contribution of ethical values promulgated by audit on the general health of the organization, yet the auditors are developing indicators for measuring their own performance. Some of the steps they are taking are in the following direction:

Conducting client satisfaction surveys Comparing practices and performances with other audit organizations,

especially with respect to methodology, audit time cycles, reporting speed, cost of audit, etc.

Measuring quantifiable parts of performance with the planned targets of the audit organization

Extent of audit recommendations accepted and implemented by the auditee

Measuring employee satisfaction through employee surveys, round tables with employees, employee training, etc.

Briefly, the internal auditors should not sit in the protected glass houses. They should demonstrate that they are equally committed to efficiency and effectiveness as they expect the auditee to be.

14. Concluding Remarks

In the paper we have surveyed, briefly, the developments that are taking place in the public sector. Some of these developments have already ushered in, while others are at the thinking stage. We have tried to relate these changes to the role and functions of the internal auditors.

3 Khan, M. Akram, “Fighting Corruption: The Role of Government Auditor”, Performit, Lahore, (XXI:1), October 2001, pp.57-98.

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The most significant change in the context of Pakistan is the realization by the government to establish internal audit function at all levels. The Auditor General has played a leadership role in driving this realization home.

It is obvious that the traditional role of internal auditor is undergoing a rapid change. The knowledge requirements for internal auditors would also change. He would be required to learn management, public administration, information technology, cyber law, forensic law and computer assisted auditing techniques. All these subjects are part of curricula at some places but they are like an ‘add-on’. In future, they would form hard core of internal auditor’s education.

The initiative to set up an institute of internal auditing in Pakistan is quite timely. There is a vast untapped field for the training of auditors both in the public as well private sector. Some enterprising people should join hands to establish the institute and provide quality education and training. Green pastures are waiting for them.

There is a need to develop a joint education and training program for public as well private sector. The borders of these sectors are already getting nebulous. The auditors should come out of this partition and join hands to provide a common plat form for auditors so that employment opportunities become available in both the sectors.

The internal auditors should understand that there is a greater demand for their accountability as well. There is a demand for establishment of independent audit committee to oversee the work of internal auditors and to provide quality assurance to the stakeholders. Thus, in future the internal auditors would face greater challenges in the performance of their work.

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BIBLIOGRAPHY

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Barret, Pat, Corporate Governance – More than Good Management. Presentation to CPA South Australian Annual Congress 2001, Adelaide, 16 November 2001, 37pp. http://www.anao.gov.au

Benchmarking the Internal Audit Function, Canberra, Australia: ANAO, 2000, pp.71

Internal Auditing in Federal Agencies, Washington, USA: GAO, 1974, 33pp.

Internal Auditing In a Changing Management Culture, Ottawa: office of the Auditor General of Canada, 1992, 49pp.

Khan, M. Akram, “ Fighting Corruption: The Role of Government Auditor”, Performit, Lahore, Pakistan, (XXI:1), October 2001, pp. 57-98.

Krogstad, Jack L., Anthony J. Ridley, and Larry E. Rittenberg, “ Where ‘re We Going?” Internal Auditor, Altamonte Springs, USA, Oct 1999, pp.26-33

Looking Ahead: The review of Audit and Accountability for Central Government, London, UK: HM Treasury Office, February 2001, 62pp. www.hm-treasury.gov.uk]

New Directions for Internal Audit, Canberra, Australia: ANAO, 1998, 38pp.

Pickett, K.H. Spencer, The Internal Auditing Handbook, New York, USA: John Wiley & Sons, 1997, 636 pp.

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