The Three Audits

And from the financial rules themselves. The rules made under article 283, chapter 1310, contain the canons of financial propriety which every authority incurring expenditure is required to observe. So propriety audit is not the auditor inventing a standard; it is the auditor applying the Government's own standard. That is the single best answer to the objection in chapter 1480 that propriety audit is second-guessing.

The canons, in substance. That expenditure should not be prima facie more than the occasion demands; that no authority should exercise its powers of sanctioning expenditure to pass an order directly or indirectly to its own advantage; that public moneys should not be utilised for the benefit of a particular person or section of the community except where the amount is small, or a claim could be enforced in a court, or the expenditure is in pursuance of a recognised policy or custom; and that the amount of allowances granted to meet expenditure of a particular type should be so regulated that they are not on the whole a source of profit to the recipient.

This book states the canons as the substance of the financial rules and does not quote a rule number, because it does not hold the rules; and a candidate should do the same.

Where propriety audit lives in practice. Chapter 1420's section 17, stores and stock; and chapter 1430's section 19, the commercial audit of a Government company, where section 2(a) brings trading, manufacturing and profit and loss accounts and balance-sheets within the definition of accounts. An audit of a balance sheet is inescapably an audit of prudence.

Performance audit

Also nowhere in the Act, and also an exercise of section 23.

What it asks. Not whether the money was lawfully spent, nor whether the price was fair, but whether the purpose was achieved, and with what economy, efficiency and effectiveness.

The three E's, and they are worth separating because they are three tests.

Economy: were the inputs acquired at the least cost consistent with quality? Efficiency: was the maximum output obtained from the inputs used? Effectiveness: were the objectives of the scheme achieved?

And the statutory hook, beyond section 23, that a good answer names. Chapter 1420's section 16 requires him to satisfy himself that the rules and procedures are designed to secure an effective check on assessment, collection and allocation of revenue. That is a test of the ADEQUACY OF A SYSTEM and not of a transaction, and it is performance audit in the Act's own language, applied to the revenue side. The Act therefore contemplates the method even where it does not use the name.

Where performance audit becomes contested. Effectiveness is a question about whether the scheme worked, and a scheme that did not work may have failed because the policy was wrong. The line between auditing the execution and auditing the policy is exactly where chapter 1480 begins.

The three set against one another

Say the ladder in one sentence and the answer is made. Regularity audit asks a question with a right answer; propriety and performance audit ask questions with better and worse answers; and the further up the ladder the auditor goes, the more he is exercising judgment and the more his findings can be argued with.

A worked example

A Ministry buys ten thousand computers for a school scheme.

Regularity. Was there an appropriation for the head? Was the head the one the House granted for this purpose? Were the tender rules, the sanction and the delegation complied with? Section 13(a), and the answers are yes or no.

All three are satisfied. Regularity audit is finished, and it has established nothing about whether this was a sensible purchase.

Propriety. Were the computers bought at a price a prudent person would have paid? Was the specification more than the occasion demanded? Did the sanctioning authority stand to gain? The canons of financial propriety, applied under section 23; and section 17 reaches the stores to see whether the computers exist.

Performance. Were they delivered to the schools? Were the schools electrified? Were the teachers trained? Did any child learn anything? Economy, efficiency, effectiveness, under section 23.

The audit finds that the computers sit in boxes because no school had power. A performance finding, and a strong one.

The Ministry replies that electrification was another department's responsibility and that the policy of distributing computers was the Government's to make. That is the objection chapter 1480 examines, and the answer this book gives there is that an audit which says the scheme did not achieve its object is auditing execution, and an audit which says the scheme should not have been adopted is auditing policy.

What beginners get wrong

That the Act provides for three kinds of audit. It provides in terms for regularity audit in section 13(a). Propriety and performance audit are exercises of the regulation-making power in section 23.

That propriety audit is the auditor's own standard. It applies the canons of financial propriety in the Government's own financial rules.

That performance audit has no statutory basis at all. Section 23 authorises regulations on the scope and extent of audit, and section 16 requires him to test whether a system is designed to secure an effective check, which is the method under another name.

That the three are alternatives. They are layers: every audit is a regularity audit, and propriety and performance are added.

That a regularity finding is weaker because it is narrow. It is the only kind that is objective and unanswerable, and it is the only kind the Constitution requires the House to act upon, in the excess grant under article 115(1)(b).

Quick revision

Regularity: was it lawful? s.13(a): legally available, applicable to the service or purpose, conforming to the authority which governs it. Objective; and an excess is a regularity finding that art 115(1)(b) obliges the House to regularise.

Propriety: was it wise? Not defined in the Act. From s.23 (scope and extent of audit) and the canons of financial propriety in the financial rules made under art 283: expenditure not prima facie more than the occasion demands; no authority to sanction to its own advantage, directly or indirectly; public money not for the benefit of a particular person or section save in the recognised exceptions; allowances not on the whole a source of profit. Lives in s.17 stores and s.19 commercial audit.

Performance: did it work? Also from s.23; and s.16's duty to satisfy himself that the rules and procedures are designed to secure an effective check is the method in the Act's own words. Tests: economy, efficiency, effectiveness.

The ladder: regularity asks a question with a right answer; propriety and performance ask questions with better and worse answers; and the higher he climbs, the more he exercises judgment and the more his findings can be argued with.

Test yourself

1. Distinguish the three kinds of audit and say where each comes from. Regularity or legality audit asks whether the expenditure was lawful, and it is prescribed in terms by section 13(a) of the Act of 1971, which requires the auditor to ascertain whether the moneys shown in the accounts as disbursed were legally available for and applicable to the service or purpose to which they were applied or charged, and whether the expenditure conforms to the authority which governs it. Propriety audit asks whether the expenditure, though lawful, was wise, faithful and economical; it is nowhere defined in the Act, and it rests on the auditor's power under section 23 to make regulations relating to the scope and extent of audit, applied to the canons of financial propriety contained in the Government's own financial rules made under article 283. Performance or efficiency audit asks whether the objectives of a scheme were achieved, and with what economy, efficiency and effectiveness; it likewise rests on section 23, and it has an analogue in the Act's own language in section 16, which requires the auditor to satisfy himself that the rules and procedures are designed to secure an effective check on the assessment, collection and proper allocation of revenue, a test of the adequacy of a system rather than of a transaction.

2. What are the canons of financial propriety? In substance, that every public officer should exercise the same vigilance in respect of expenditure from public moneys as a person of ordinary prudence would exercise in respect of his own; that expenditure should not be prima facie more than the occasion demands; that no authority should exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage; that public moneys should not be utilised for the benefit of a particular person or section of the community, unless the amount involved is insignificant, or a claim could be enforced in a court of law, or the expenditure is in pursuance of a recognised policy or custom; and that the amount of allowances granted to meet expenditure of a particular type should be so regulated that they are not on the whole a source of profit to the recipients. They are contained in the financial rules made under article 283, and it follows that propriety audit applies the Government's own standard rather than one the auditor has invented, which is the best answer to the charge that it amounts to second-guessing.

3. What does performance audit examine? Three things, usually called the three E's. Economy, whether the inputs were acquired at the least cost consistent with the quality required. Efficiency, whether the maximum output was obtained from the inputs used. And effectiveness, whether the objectives of the programme or scheme were in fact achieved. It is the form of audit that produces the findings a legislature and a public are most interested in, and it is also the form that carries the audit closest to the boundary with policy, since a scheme that did not achieve its object may have failed because the policy underlying it was wrong, and to say so is to audit the policy rather than its execution.

4. Why is the source of each audit worth knowing? Because it decides how an objection to the audit is answered. Where the auditor makes a regularity finding, the objection that he has exceeded his mandate cannot be made at all, since section 13(a) requires exactly that inquiry. Where he makes a propriety or a performance finding, the mandate has to be located, and it is located in section 23, which authorises him to make regulations for carrying into effect the provisions of the Act in so far as they relate to the scope and extent of audit, and which, unlike the corresponding provision for the Central Vigilance Commission, requires no approval from the Government. The auditor accordingly settles the scope of his own audit, which is a stronger position than any other institution in this syllabus occupies; and the counter-argument, that a power to define the scope of audit is not a power to define audit as something other than audit, is the substance of the controversy the next chapters take up.