RAA Papers

Table of Contents

Evolution of the audit system in Bhutan
Audit mandates
Scope and Jurisdiction
Definition of Economy Efficiency and Effectiveness
Economy in procurement practices
Economy in contracting process
Execution within budgets
Efficiency in material management
Efficiency in HRD
Efficiency in the management systems
Effectiveness of programmes/projects
Conclusion

Concept of Economy, Efficiency and Effectiveness Evaluation

Evolution of the audit system in Bhutan

Bhutan consciously adopted an efficient and effective financial management system to support and enhance its development plans from the very inception of the development plans. The financial management system stressed on the accountability of resources, effective evaluation and reporting for appropriate decision making.   The audit organization was reposed with the responsibility of evaluating and reporting on the economic and efficient management of scarce resources of the Royal Government.

As early as 1961, the 16th National Assembly proposed the establishment of an audit system. In response to the need for establishing accountability, the Royal Government issued the first edition of the "Financial Manual" in 1963.  The manual provided for the organization of the Development wing of the government and the Accounts and Audit for the Development wing.  The Audit and Accounts organization maintained the books of accounts, conducted budgetary controls of revenues and expenditures and undertook periodic audit and inspections of accounts and records.

The 31st National Assembly voted in October 1969 for the appointment of Royal Auditors to conduct the audit of accounts and records of the Royal Government.  Consequently, four Royal Auditors were appointed on 16^th April 1970 under a Royal Ordinance (KASHO).  The ordinance defined and authorized the jurisdiction of the then Royal Audit Department as primarily responsible for the audit of accounts of the Ministry of Finance, all other Ministries, the Royal Bhutan Army, the Royal Bhutan Police and the His Majesty's Secretariat.

In 1974, the financial management system was restructured.  The Financial Manual 1974, acclaimed under the 29th resolution of the 34th Assembly placed the Royal Audit Department under the Ministry of Finance. In 1985, the audit service was restructured as an autonomous entity and named as the Royal Audit Authority (RAA).  Issuing of Financial Manual 1988 further strengthened the financial management system. Subsequently, in 1989, the General Auditing Rules and Regulations (GARR) were issued properly defining the roles and responsibilities of the Royal Audit Authority.

The latest Kasho of March 2, 1999 further reiterates the independence of the Royal Audit Authority.

Audit mandates
     
The canons of auditing are contained in the six Royal Commands of Kasho issued by His late Majesty, the King. The General Auditing Rules and Regulations (GARR) 1989 is a promulgation of these Kasho which stipulate that the Royal Audit Authority (RAA), in executing audit functions shall conduct:

•    comprehensive audits;

•     financial and compliance audits;

•     performance audits; and/or

•     any other form of audit as it may deem proper.

Audit reports as per GARR shall recommend measures to improve economy, efficiency and effectiveness in government operations.

Chapter 5, Para 5.6.5 (c) of the Financial Manual 1988 also stipulate that as a part of the budget accountability phase the RAA has responsibilities to report whether the agencies are ensuring economy, efficiency and effectiveness in the operations of the government.

Scope and Jurisdiction

The General Auditing Rules and Regulations mandate the RAA to carry out any type of audit, as it may deem proper. Presently the RAA conducts financial and compliance audits of about 400 agencies including externally funded projects, Government and joint sector corporations, financial institutions and non government organisations as tabulated below:

Sl. No	Jurisdiction	No. of agencies
1	Government budget agencies	228
2	Externally funded projects	101
3	Government/joint sector corporations	32
4	Financial institutions	5
5	Non Government Organisations	6
	Total	372

In addition special investigations and special subject reviews are also carried out for selected agencies as required from time to time.

The Royal Audit Authority reports informally some aspects of economic evaluations but not in a systematic manner. Systematic evaluations on the efficiency of systems and effectiveness of operations are not conducted mainly due to resource constraints.

Definition of Economy Efficiency and Effectiveness

Economy refers to terms and conditions under which resources such as financial, human and material are acquired. An economical operation acquires these resources in appropriate quality and quantity at the lowest cost. For example, when the actual cost of an operation is compared with the standard, a favourable deviation would mean economical operation.

Efficiency refers to the relationship between goods and services produced and resources used to produce them. An efficient operation produces maximum output for any given set of inputs, or it has minimum inputs for any given quantity and quality of services provided.

Effectiveness of an activity is the extent to which the actual outcome of the activity matches with the objectives of that activity. It involves a comparison between what a program actually accomplishes and what it was intended to accomplish.

Economy, Efficiency and Effectiveness if put together, relate to the extent to which government resources are expended economically and efficiently and the extent to which the related programs are effective in meeting their objectives.

1.     Economy Efficiency and Effectiveness audits

Economy and Efficiency audits include determining:

·       Whether the entity is acquiring, protecting and utilizing its resources (such as human, financial and material) economically;

·       The causes of inefficiencies or uneconomical practices; and

·       Whether the entity has complied with laws, rules and regulations on matters of economy and efficiency.

Effectiveness audits means the audit of effectiveness of performance in relation to the achievement of objectives of agencies audited and audit of the actual impact of activities compared with the intended impacts. However, the effectiveness of programs is not always easily evaluated.

The Royal Audit Authority in the past, did look into some aspects of economy and efficiency audits, but not in the most structured way, as it ought to have been.

2.     Need for Economy Efficiency and Effectiveness Evaluations

The need for economy, efficiency and effectiveness evaluations arises from the fact that information obtained from such evaluations are more objective and help better decision making as discussed below:

¨     Increasing financial commitments

The role of government in terms of financial commitments are increasing significantly, as appropriations to projects, programs and other government departments are increasing each year. There needs to be a system to evaluate and report whether the scarce government resources such as human, financial and material are procured, protected, and utilized with due regard for economy and efficiency by the implementing agencies and whether they are achieving the goals set by the government.

¨     Priority on economic growth

The government has been providing an increasing array of goods and services for the benefit of general population. For instance, current government’s programs such as education and health for all by the year 2000. The government is making sophisticated attempts to achieve economic growth. This has led to administrative reforms, particularly in improving administrative efficiency within the government. Existence of any system to evaluate and report on the attempts of the government as a feed back would help immensely in making further investments in future.

¨     Emphasis on small compact and efficient civil service

The government has explicitly stated the objective of developing a ‘small, compact and efficient’ civil service as a necessary prerequisite for realizing the country’s economic dreams. To enhance efficiency and productivity in the civil service, the government has been taking such steps as better salary for civil servants, emphasizing on a corruption free and transparent bureaucracy, periodical retrenchment etc. There needs to be a system to evaluate the performance and report on the efficiency in civil service.

¨     Human Resources Development and Management

One of the strategies adopted by government for enhancing the efficiency and productivity in civil service is through the process of continuous human resources development. The government has been making concerted efforts for professional development of civil servants through further studies, training, seminar/workshops etc. in country and abroad. There needs to be a system of evaluating, whether the productivity and efficiency in civil service have really been enhanced, besides looking into proper management of human resources.

¨     Information technology

Like in any other countries around the world, the government has given due importance to the advent of information technology. The government has been making a lot of investment in the procurement and installation of computer systems in various agencies. The information technology enables the work to be done more quickly, efficiently and effectively. The rapid dissemination of information enhances the efficiency and productivity of works by prompting for a faster decision making. How far has the information technology enhanced efficiency and productivity has to be evaluated and reported upon to see its real impact.

¨     Increasing government projects and programmes

The socio-economic development of the country has been one of the major priorities of the government in the implementation of the five-year plans. As a result numerous projects and programmes are being initiated each year. How have these projects and programmes been managed in terms of economy, efficiency and effectiveness. There has to be a system of evaluating the effectiveness of such projects and programmes in terms of providing better services to the beneficiaries.

¨     Inadequacy of traditional auditing

Economy and efficiency audits complement the traditional auditing of financial statements and compliance auditing. For a more objective information, traditional auditing of how much money has been spent is felt inadequate. Economy and efficiency audits review key management activities and assess the adequacy of related systems and controls to ensure due regard for economy, efficiency and effectiveness.

¨      Accountability relationship

One of the objectives of the Royal Audit Authority is enhancing government accountability of agency heads and administrators for compliance with applicable laws, policies, rules and regulations, accountability for economical and efficient management of government resources and operations, and accountability for programme results or effectiveness of operations for the ultimate attainment of goals set by the government. For the purpose, only knowing how much has been spent is not enough. The question of whether it is being spent for the purpose intended and whether value for money is being received, can only be answered by economy and efficiency audits.

3.     Trend in other countries

Most developed and developing countries have embarked on the audit of economy, efficiency and effectiveness although different countries name it differently.

     In Canada the concept of comprehensive auditing was first developed in the 1970s, in response to a conviction that an audit of the financial statements does not fulfill all the accountability requirements of organisations handling public funds. Today, Comprehensive audit information is widely accepted by both the public sector as well as the private sector for effective decision making.

    In Pakistan, performance auditing has developed so well that the Supreme Audit Institution of Pakistan even conducts training courses on performance auditing for auditors from the Afro-Asian countries.

    In Trinidad and Tobago, traditional audits were seen to be insufficient as other information on value for money issues were sought. As a result, a limited form of efficiency auditing was started in 1972, which took the form of Comprehensive Auditing in 1986.

    In India, Economy Efficiency and Effectiveness audits are being carried out as Performance auditing. Compared to other countries, Performance auditing in India is still evolving, as the State Audit Departments is taking up this audit in a more structured manner.

Keeping in view that economy and efficiency audits provide more meaningful information on accountability relationship and whether value for money is received. More and more Supreme Audit Institutions around the world are embarking on the economy, efficiency and effectiveness audits.

4.     Economy efficiency and effectiveness evaluations for Bhutan

Economy and efficiency evaluations would also be appropriate for Bhutanese context. It has to be appreciated that the Government has only limited resources at its disposal and the most economical, efficient and effective utilization of resources is but expected. These evaluations if carried out, will enable the Royal Audit Authority, to evaluate and report whether the scarce government resources such as human, financial and material are procured, protected, and utilized in the most economical and efficient manner by the implementing agencies and whether they are achieving the agency goals.

5.     Usefulness of Economy, Efficiency and Effectiveness audit information to the executives

Economy and Efficiency evaluations focuses on an objective and constructive assessment on how well the financial, material and human resources are managed at different levels of execution. The effectiveness evaluations reports on the achievement of programs as against the expectations and goals set by the Government. These  reports will be useful to the executives in:

Effective decision making

An objective economy, efficiency and effectiveness audit information can best be utilized for effective decision making. Information are based on factual evaluations of government operations and financial management systems.

 Enhance accountability

The economy and efficiency reviews are mainly focussed on the management of government operations and financial management systems. The report will focus on the fulfillment of accountability and will be useful to the executives for enhancing government accountability at all levels, which is the primary objective of the Royal Government.

      Detection and prevention of fraud and corruption

Fraud and corruption generally stems from the lack of a proper check and balance mechanism in the system or from misuse of authority and power. Although fraud and corruption may exist, it is generally reported as negligible. The economy, efficiency and effectiveness evaluations if carried out periodically, will act as deterrent against fraud and corruption.

     Enhance effective internal controls

One of the objectives in economy and efficiency reviews is to evaluate the existence of strong internal controls in the management systems and its reliance. Non-existence and weakness in internal control systems can be detected and recommendation made to institute proper internal control systems.

6.     General acceptance of economy, efficiency and effectiveness audit information

The economy, efficiency and effectiveness evaluations literally being new concepts in the Bhutanese context, there might be some resistance initially, as there is always some resistance to any change. However, considering the facts that economy and efficiency evaluations enhance in the effective decision making, enhance accountability and act as deterrent to fraud and corruption, such information will surely find general acceptance gradually.

Economy in procurement practices

    whether procurement practices are sound and in compliance to proper procurement formalities,

    bulk purchases have been made to avail discounts, and avoiding piecemeal purchases

    whether there are instances of any excessive procurement leading to obsolescence, deterioration, storage problems etc.

    whether there are procurement of sub-standard quality and to wrong specification

- whether the rates are reasonable

- whether there are instances of uneconomical purchases and the causes and potential effects of such practices.

Economy in contracting process

-                  proper tendering of contracts

-                  existence of tender committees

-                  evaluation of tenders

-                  inappropriate methods of tendering

-                  favouritism/biases

-                  existence of terms and conditions for safeguarding the interest of the government

-                  existence of penalty clauses to preclude from any sub-quality/sub-standard works

-                  system of proper verification of bills

-                  correctness of rates

Execution within budgets

-                  no diversion of funds

-                  no supplementary budgets have been sought for

-                  excessive and wasteful expenditures

The government is looking for ways of improving efficiency and productivity in the civil service through office automation, motivation and incentives, use of information technology etc. besides making efforts to control corruption which impedes the development process. Some of the areas in which efficiency reviews can be made are;

Efficiency in material management

-                  procurement of right quantity, quality and specification at the right time

-                  existence of proper system in the receipt, issue and utilization of stores

-                  existence of system for periodical physical inventory

-                  adequate procedures to ensure security and custody avoiding any misuse

-                  proper disposal system to yield maximum benefit

Efficiency in HRD

-       existence of clearly defined job description and responsibilities

-                  conducive working conditions

-                  no duplication of works

-                  right job to the right person

-                  professionalism and training

-                  motivation of staffs with timely promotion, appreciation etc

-                  system to evaluate the staffs

-                  co-operation and co-ordination amongst staffs

-                  supervision of staff

Efficiency in the management systems

-                  existence of proper management controls

-                  flatter organization structure

-                  well defined systems

Decision-makers are increasing their demand for objective information and beyond what can be provided by financial and compliance auditing, such as:

-                  information on actual

-                  information on expected

-                  information on physical accomplishments

They have a fundamental responsibility to know what is being done and accomplished by those to whom they have delegated authority and resources. They want to have a better understanding of the projection vis-à-vis achievements for future process for allocation of resources. They are looking for information that is accurate, relevant and timely. Although government agencies are required to report on their accountability for government resources, as feedback, it is either not reported or not always clearly stated. The reports concentrate mostly on activities undertaken in the relevant fiscal period and give no indication of reliability.

Effectiveness of programmes/projects

Besides feedback, programmes and project evaluation can be of immense use. Information on how well a programme/project is achieving the goals set by the government or how prudently is the programme/project utilizing the scarce resources can be an eye opener to the government for future investment in such programmes/projects. Further, information on the impacts of such programmes/projects can also be reviewed and reported upon.

-                  existence of a system of program evaluation

-                  achievement of objectiveness against intended

-                  impact of programs/projects

-                  specific level of effectiveness

-                  performance indicators

-                  comparable with other similar projects/programs

Some of the usefulness of such information is summarized below:

-                  existence of performance indicators

-                  input/output relationship

-                  wastage

-                  excessive procurement

-                  inappropriate methods of processing

-                  benefits of considering alternatives

-                  cost benefit analysis

-                  make or buy decisions

-                  internal/external borrowings

-                  procurement of inappropriate qualities

-                  cheapest is not always best

-                  lack of co-ordination

-                  inappropriate/outdated rules

-                  inappropriate systems and procedures

-                  misuse of funds

-                  diversion of fund

Conclusion

Auditing is no longer merely concerned with the appropriateness of financial records and compliance with legal requirements. It has taken different forms with the ever-changing auditing environment. From the old traditional audits, it has now shifted to the likes of auditing in an EDP environment, value for money auditing, and environmental auditing etc. It has been a real challenge for the auditing profession to keep up pace with the ever changing auditing environment. More and more executives are looking for objective information that will enhance better decision-making.

It is the right time now, for the Royal Audit Authority like other Supreme Audit Institutions around the world to embark upon the Economy, Efficiency and Effectiveness audits from the old traditional approach in line with the audit mandates so as to provide more objective and meaningful information to facilitate the decision-makers in the government.