Performance audits. (as a function of internal auditors) (The CPA in Industry)by Stack, Larry
Traditionally, audits of a department's performance have not occurred because internal auditors feel they are 1) unqualified, 2) performing something outside the scope of their audit function, and 3) content working on control weaknesses. For an auditor to feel he or she is unqualified in evaluating a department's performance is like a mountain climber who can scale a mountain but is afraid of the view when he gets to the summit. Auditing performance requires mostly curiosity; it does not require experts in the operation of a department.
The excuse that performance is outside the scope of the audit department's jurisdiction demonstrates a lack of confidence. We are paid professionals whose job is not only to answer internal control questions and perform compliance tests on accounting data, but to help determine the viability of a department. Also, top management is more interested about the health of a department than if purchase orders are signed by three people to conform to some outdated policy.
Lastly, the narrow view of auditors performing in drone-like fashion following a pre-established audit program is perhaps the profession's greatest weakness. What is missing in our profession is the importance of doing what we can and must do for our company's survival. For too long, internal audit's success has been based in a world of controls. Though important, this approach loses the essence of what a department and a company are about. And because we are not dealing with the essence of a department, the value of our work is far less important, especially in a recession, than it could ultimately be to management and, more importantly, to ourselves.
Essential Elements of a
The essential elements of a performance audit can be thought of as a high level review of how healthy a department is within itself, within a company, and to the world. By concentrating on this fundamental level and obtaining information concerning it, the auditor can determine how well the department is performing and report germane findings to management.
Six Elements of Performance
Effectiveness. Effectiveness what was accomplished compared to what was expected. Simply put, what were your plans and were they accomplished? Each person, each department, and each company should have effectiveness objectives.
Department heads may fear effectiveness - type, questions because it could mean the empire they have built may be threatened. These questions could also cause department heads with questionable abilities or job responsibilities to be exposed, reassigned, or terminated. White collar professions traditionally have been immune to a thorough analysis like this because these positions were considered beyond reproach. Consequently, some individuals have abused their positions. To help facilitate an effectiveness audit, an auditor should compare the department to industry and company standards.
Efficiency is simply a question of whether a department used more resources than it planned to. When confronted, many auditors would immediately look at the financial budget and see if variances were reported to management. in all likelihood, that would be the extent of their efficiency audit. In reviewing efficiency, the auditor must look at all resources departments use. These resources include time, personnel, number of items used, number of supplies used, and any other relevant input into their process. Only by looking beyond dollars can an auditor determine how efficiency something is run and discover other problem areas that he or she will not come across during a financial review.
Quality of Output. Quality means a department is producing all their items with minimum variation. In this area an auditor just has to ask how a department tracks its work from input to output. Only by being able to measure each aspect of the functions performed can an auditor obtain a clear picture of how well the deparment is doing its functions.
Productivity. Productivity is a department's output compared to what is input. To analyze productivity, the auditor must look at the resources used to get the desired output. An auditor should not be discouraged if there are no financial numbers involved because some of the most important departments involved in a newspaper can not be valued in dollars. An example is the newsroom. An auditor can review how much time is spent on developing and reporting a story, and with that data get an indication of how productive a reporter is.
Quality of Work Life. Another measure of performance is the quality of work life. An auditor can check the turnover and professional classes taken by employees as one indication of how happy employees are with their jobs. Though there is no financial implication, analyzing an employee's job contentment can have a direct impact on the performance of the department.
Innovations. Innovations done by a department are important to measure because it shows if a department head is interested in continuous improvement. Continuous improvement is the trademark of any forward looking department. To audit this area successfully requires the auditor to understand what comparable departments are doing in the industry and world.
The six measures can help determine the long-term survival of a department and company. As has been demonstrated, financial data may not be needed to audit these areas. It should be noted that the profitability of a department is also a performance measure. But it is only one measure and can be misleading if it is the sole determinant of a department's performance.
The Benefits Are Obvious,
So Why Wait?
The benefits to management of performance auditing are self-evident. Management can have a capsule view of the department from current, short-term, and long-term perspectives. For the auditor, reviewing performance will give more than just significant findings. Performance audits allow the auditor to learn and be exposed to thinking beyond controls. Performance audits make the auditor an inside player in the company, and with it come the perks of more respect, responsibility, and the great relief of feeling their job is not a necessary evil. Our job will become a necessary and vital part of the organization. In addition, the auditor will obtain a view quite different form the one he currently has. He will become a more enlightened human being.
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