A performance audit is an independent review that provides objective analysis of a government entity’s programs, functions, or management systems. This type of review moves beyond simply checking if financial records are accurate to assess how well public resources are being managed and used. It serves a role in public sector accountability by providing transparency on whether government operations are executing their responsibilities legally and cost-effectively. The findings from these audits help organizations improve processes, reduce costs, and operate more effectively for the benefit of the public.
Defining the Performance Audit
A performance audit is a systematic examination of an organization’s undertakings to determine if they are operating in line with the principles of efficient and responsible resource management. This review is typically applied to public sector entities, but the methodology can also be used for non-profits or private companies that receive public funding to execute government programs. The scope of a performance audit is broad, covering organizational structures, administrative systems, activities, and specific programs.
Professional standards for conducting these audits are established by organizations like the U.S. Government Accountability Office (GAO) in its Generally Accepted Government Auditing Standards (GAGAS), also known as the Yellow Book. The International Organization of Supreme Audit Institutions (INTOSAI) defines a performance audit as an independent examination regarding the economy, efficiency, and effectiveness of government operations. This assessment provides new information and insights that lead to constructive improvements within the audited entity.
Objectives of a Performance Audit
The goal of conducting a performance audit is to promote better governance and contribute to public accountability and transparency. Auditors provide an objective analysis and evaluation of evidence against predefined criteria to reach findings and conclusions. This process assists management and oversight bodies in improving program performance, reducing operational costs, and facilitating better decision-making.
Performance audits ensure management controls are adequate and that programs comply with relevant laws, regulations, and policies. By identifying deficiencies and recommending enhancements, these reviews help government administration achieve better outcomes for the public. The findings from a performance audit increase public confidence by demonstrating that government spending is used responsibly to achieve intended goals.
Key Pillars of Evaluation
Performance audits are distinguished by their focus on three specific dimensions of performance, often referred to as the “Three Es”: economy, efficiency, and effectiveness. An audit may focus on one or a combination of these aspects to assess the value generated by public spending. The relationship between these three elements is often interdependent, with improvements in one area frequently influencing the others.
Economy
Economy focuses on minimizing the cost of resources acquired for an activity while maintaining the appropriate level of quality. The audit assesses whether the entity obtained resources—such as personnel, equipment, or services—at the best possible price. For a public transportation agency, an audit of economy might examine the procurement process for new buses, checking if the agency secured competitive bids and purchased vehicles that meet necessary safety and operational standards at the lowest feasible cost.
Efficiency
Efficiency is the relationship between the output of goods or services and the resources used to produce them. An efficiency assessment looks at process optimization, determining if the maximum possible output is being achieved from a given set of inputs, or if the same output could be achieved with fewer resources. For the transportation agency, an efficiency audit might analyze the bus maintenance schedule to see if it minimizes vehicle downtime and maximizes the number of operational hours per mechanic hour.
Effectiveness
Effectiveness measures the extent to which a program’s objectives are achieved and whether the intended results or impact were produced. This pillar focuses on outcomes, assessing if the program is achieving its stated policy goals and delivering the intended benefits to the target population. A review of the transportation agency’s effectiveness might examine whether the newly implemented bus routes reduced traffic congestion or improved public access to job centers, as stated in the program’s original goals.
The Performance Audit Process
The performance audit process begins with careful planning and ends with follow-up on recommendations. The initial phase involves selecting a topic based on factors like public interest, risk, and potential for improvement, followed by defining the audit’s objectives and scope. Auditors then identify the criteria—the laws, regulations, or standards—against which the entity’s performance will be measured.
The examination phase involves fieldwork, which includes collecting and analyzing evidence using methods like interviews, data analytics, and document reviews. Auditors compare the entity’s current condition against the established criteria to identify differences. These differences are developed into audit findings, which typically include the condition, the criteria, the cause of the gap, and the effect of the deficiency.
The final phase involves reporting the findings and recommendations to the audited entity and relevant oversight bodies. A draft report is shared with management to obtain formal comments and ensure all facts are accurate before the final report is published. The report provides clear, feasible recommendations addressed to parties with the authority to initiate corrective action.
How Performance Audits Differ from Financial Audits
Performance audits and financial audits serve different purposes, though both are assurance engagements governed by professional standards. A financial audit focuses on historical data, assessing whether an organization’s financial statements are presented fairly and accurately in accordance with accounting principles. Its core question is whether the numbers are correct, providing an opinion on the reliability of financial data for stakeholders like investors and creditors.
A performance audit focuses on operations, systems, and processes, identifying opportunities for improvement. Instead of checking for compliance with Generally Accepted Accounting Principles (GAAP), performance audits use a broader set of criteria, such as laws, policies, best practices, and performance benchmarks. The performance audit answers whether money is being used well, while the financial audit confirms the accuracy of where the money went.
The Impact and Use of Audit Findings
Once finalized, the audit findings and recommendations serve as a foundation for change and oversight. Management of the audited entity is expected to review the recommendations and develop a corrective action plan. This formal management response is often included in the final public report, outlining the steps the entity will take to address the identified deficiencies.
Legislative bodies, such as Congress or state legislatures, use the audit findings to exercise their oversight responsibilities and hold government programs accountable. The public release allows citizens and media to understand how public funds are being managed. Supreme Audit Institutions (SAIs) often conduct follow-up audits to assess whether the entity implemented the recommendations and if expected improvements have been realized.