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- Tracing the Historical Traditions of Auditing
- Auditing as an Institutional Arrangement
- Models of Auditing: State, Private, and People’s
- Organization of Auditing: Court or Administrative System
- The Cameral System
- The Administrative or Monocratic System
- Interrelating With Others: Parliamentary-Led or Executive-Led Auditing
- Auditing as a “Neurosis”
- The Politics of Auditing
If accountability is the hallmark of democratic governance, public auditing is a means to achieve it. Auditing is a form of oversight, or examination from some point external to the system or individual in question. Technically, auditing is a form of verification by an independent body, which compares actual transactions with standard practices. Because it evaluates the relationship of what is against what ought to be, auditing is a normative operation. Public auditing is the traditional instrument to hold actors entrusted with managing public funds accountable by providing information to supervising agents, elected officials, and (sometimes) constituents about compliance with or deviations from accepted standards. Although accountability as a general aim of auditing is undisputed, unavoidable tensions with other principles of good governance arise, such as the exercise of informed discretion by elected decision makers or individual privacy rights when the corset of control is taken to an extreme.
The media, interest groups, private overseers (e.g., credit-rating agencies), international organizations, public audit institutions, and the general public increasing see modern government as an object of scrutiny. At the same time, government regulates society and delivers services through myriad national, international, nonprofit, and private organizations, making control a highly complex issue. The question is: Who oversees whom for what purpose, under whose authority, with what kind of legitimacy, and how?
The balance of autonomy and control is a classic topic for students of government. It touches on issues such as responsibility, trust, functional differentiation, authorization of execution, assurance, and accountability. At its center stands the question of how public organizations can be task efficient and accountable at the same time.
this research paper is divided into four sections: The historical traditions of auditing are traced in the first section, the second one introduces different institutional arrangements of auditing, the third one sketches the main arguments of the audit explosion discourse, and the final one illustrates the politics of auditing.
Tracing the Historical Traditions of Auditing
Auditing is one of the oldest and most eminent of state functions, and early forms preceded the rise of the modern democratic state. The Latin word auditus means “a hearing.” In ancient Rome, the organization of a “hearing of accounts” was a way in which one official would read out his accounts to another who would compare the figures. This form of oral verification was intended to prevent officials in charge of funds from misusing them. Governors of ancient civilizations, for example, Sumer, Egypt, Phoenicia, Greece, and Rome, appointed trustworthy clerks to find and punish employees for embezzlements and to protect public assets. Early Chinese writings from the 12th-century BCE illustrate an advanced understanding of the role of auditing, describing methods and practices of good economic management and the necessity of securing an independent and high-level status for the auditor. One of the earliest records of public sector financial management in India is the Arthashastra written by Kautilya, who was a Brahmin minister under Chandragupta Maurya, the founder of the Mauryan Empire, about 2,300 years ago. Kautilya developed bookkeeping rules to record and classify economic data, emphasized the critical role of independent periodic audits, and proposed the establishment of two important but separate offices—the treasurer and the comptroller-auditor.
The origin of public auditing lies therefore in the review of financial transaction. The concept is closely related to the development of private sector accounting techniques in 16th-century Venice, but some supreme audit institutions date their origin back to the 13th and 14th centuries. The National Audit Office in the UK sees its origin in the early 14th century, the French Cour des Comptes cites 1318 as the year of its inception, professional forms of supervision and control of resources in Mexico date back to the Aztec Empire. These audit institutions were not independent of the ruler or crown and were designed to control the financial conduct of the crown servants. Their aim was to protect the interests, property, and wealth of a ruler at a time when the state was still considered private property. In concert with trends of the 18th and 19th centuries—the diminishing role of family and personal loyalty, the increasing division of labor in economy and state (functional differentiation), the emergence of big government, new ideas about responsible behavior of public servants— audit institutions changed in scope, quality, and quantity.
As parliament gained power to grant the financial means to execute public tasks, the need arose to oversee the respective administrations or institutions using the financial resources. The objective was to ensure that the regularity and probity of the expenditures was in accordance with the defined aims of parliament. The state budget was and is the prerequisite for this form of formal legal rationality. Its verification rests on checking receipts against authorized state budget expenditures and vice versa.
The clearest transformation was from internal to external auditing and with it the emergence of independent audit institutions, often considered to be the extended arm of the parliament via the executive government. Over time, they gained a constitutional status in many countries, which secured their statutory and operational independence from executive interference. In many countries, however, especially those under authoritarian rule, this was the exception rather than the rule. In the former German Democratic Republic, an independent audit system did not exist to execute the directives of the Ministry of Finance, which made the Central Committee of the Communist Party a political tool to oversee the completion of economic plans in a state-directed economy. The attribute of constitutionally secured independence of the auditor from those holding and executing power (relational distance), for example, cabinet, bureaucracy, parliament, and the auditor’s role in ensuring good governance have become, as many see it, the key to the auditor’s legitimacy in democracies. The many authoritarian regimes that lack an autonomous body of oversight in effect allow the instrumentalization of spending for partisan purposes. The Mexico Declaration on SAI Independence of the International Organization of Supreme Audit Institutions advocates principles of good auditing and tries to establish common standards of auditing among its global member organizations. It specifies organizational, functional, and financial independence as the core prerequisite to accomplishing tasks objectively, effectively, and without external interference.
The state audit evolved from a rather crude tool to prevent chaos and ruin in public finance to an advanced instrument for safeguarding responsive, accountable, open, regular, and efficient government. Compliance auditing (verification of accounts, legality of expenditures, the organization’s adherence to regulatory guidelines) and financial auditing (the overseeing of public accounts, assessing accuracy and fairness of an organization’s financial statements) were the primary purposes of auditing; performance auditing (examination of how government programs operate and how well they achieve the defined objectives) came somewhat later, gaining an important place in the auditing realm with the new public management reforms. The latter is often referred to as value-for-money auditing, or evaluating the efficiency, effectiveness, and economy of programs and policies. Such a focus is supposed to give way to comparisons with performance criteria of best practices from the private sector. Its critics claim that performance auditing has contributed to an overstretched meaning of auditing: For example, conceptual boundaries with forms of evaluation have started to blur.
Auditing as an Institutional Arrangement
Internal versus external auditing is the most basic differentiation of types of auditing. It refers to the organizational status of the auditing entity relative to the one it audits. Internal means that the auditor is part of the organization and the organization’s employee; external refers to an external oversight body or person operating independently of the entity being audited. Because internal auditors are part of the organization under scrutiny, they work for the benefit of the management of the organization under examination and their insights remain mostly disclosed only within the management. In contrast, external auditors review financial transactions and/or statements and serve third parties, for example, parliament, president, who need reliable financial information about those entrusted with the management of public funds.
Models of Auditing: State, Private, and People’s
The audit of public sector organizations staffed with civil servants differs. The most general classification is based on the question of who conducts the audit. Here we can distinguish between state, private, and people’s auditing. State auditing can be divided into three subgroups according to government level:
- supreme audit institutions (e.g., the British National Audit Office) examine the affairs of federal government departments;
- second- or third-level audit institutions (which can be fully independent of other government levels) exist in states, provinces, and municipalities of federal systems to audit their own government entities; and
- internal auditing bodies operate within any governmental department or agency.
Professional accounting firms charged with private auditing conduct special-purpose audits (such as reviewing public enterprise accounts) and have increased in number and scope in recent decades along with the growth of government-owned business corporations in the public sector. The third audit model, people’s auditing, was exercised in the former Soviet Union by the Narodnyi Control (Soviet People’s Control) as part of a combination of professional auditors with millions of volunteers as so-called people’s inspectors who conducted examinations and inspections in their spare time. This system was meant to educate the masses and be a training ground in the transformation of the country into a communist society. According to the communist ideology, the professional state apparatus would eventually wither away and the ordinary people would take over.
Organization of Auditing: Court or Administrative System
State (supreme) audit institutions can be classified into two broad groups according to their organization: the cameral or court system and the administrative or monocratic system.
The Cameral System
In the cameral system, the audit institution is headed by a group of auditors whose independence is ensured by their judicial status and who examine governmental accounts as well as the uses of public funds. To this ideal-type model belong most of the Roman law-based countries, such as not only the Corte dei Conti in Italy, the French Cour des Comptes, and the Tribunal de Cuentas in Spain but also the European Court of Auditors, the German Bundesrechnungshof, the Dutch Algemene Rekenkamer, and the Auditorfa General de la Nacion of Argentina in Latin America. In Italy, France, and Spain, the auditor often acts as an administrative tribunal with quasi-judicial powers in administrative matters, whereas the variant of this collegiate system in Sweden, the Netherlands, and Germany is without jurisdictional authority. The strong legalistic foundation in both variants of the “cameral system” privileges legal and financial compliance over performance auditing. Though in principle a collegiate model in which everyone enjoys the same rights and duties, the institution is commonly headed by a kind of primus inter pares. As a “first among equals,” he or she can exert, as in the German case, considerable influence by selecting the heads of sections and tailoring the areas of operation. Despite these far-reaching organizational competencies, the head of the institution cannot interfere with actual matters of auditing or the content of inspectors’ decisions.
The Administrative or Monocratic System
In the United Kingdom (UK), Canada, and most of the former British Empire dominions and colonies, as well as countries such as Mexico, Chile, and Colombia, the state audit institution is organized under the administrative or monocratic system, which is similar to a hierarchically structured government department—that is, headed by a single person called the comptroller or auditor general and acting as an auxiliary institution to the legislature, although charged with ample autonomy. The head of the institution enjoys an independent status, but the institution itself functions according to hierarchical principles of lines of command. Under this system, controls are intended to correct rather than penalize. Supreme audit institutions in these countries focus more on ex post auditing, rather than ex ante control, and emphasize financial and performance auditing over compliance control.
Interrelating With Others: Parliamentary-Led or Executive-Led Auditing
Audit institutions are embedded in political environments, which is exhibited by the way they interrelate with other actors. Though they all enjoy statutory independence, differences arise with regard to instrumental institutions: the one to which they report, the one that appoints the head of the Supreme Audit Institution, and the one that assigns the annual budget. Despite their statutory independence and regulations to protect that status, auditors are dependent on, for example, national legislative bodies or governmental budget support—forms of leverage that can be used to compromise the auditor’s independence.
In Argentina, Canada, Germany, the United States, Israel, Mexico, and the UK, the parliament or a special committee appoints the Auditor General, acts as supervisor, and decides on the annual budget. This system has been labeled parliamentary led, as the auditor is considered the extended arm of the legislator. In an executive-led system such as France (also Ecuador), the “Premier President” and other magistrates of the Cour de Compte are appointed by a decree from the President of the Republic. Appropriations are officially related to the Prime Minister but have special authorization by Parliament. Reports are directed to the president and legislative branch of government. China also has an executive-led arrangement: The auditor reports to the Premier of the State Council (the head of the Chinese government) and the ministry of finance controls the budget. Sweden’s Riksrevisionen, which until 2000 was similar to the executive-led model, now carries out its state audit functions under the auspices of Parliament.
Auditing as a “Neurosis”
Balancing independence with control is a classic topic in public sector research. The new public management (NPM) hype sparked an increased interest in performance auditing, primarily understood as an assessment of efficiency goals and other indicators of economic success with a corresponding system of controlling and reporting. At its center stands the question of how public organizations can be task efficient and accountable while being relatively free of bureaucratic impediment.
In the past 2 decades, almost every local government and many national administrations in OECD countries have implemented some kind of NPM reform. This “wave of modernization” has in many cases changed the way governments and local authorities operate and eventually also the audit regime. Although the NPM doctrine does not prescribe a well-defined list of reform steps, the stereotypical tool box includes privatization, deregulation, outsourcing, service delivery competition, semiautonomous service centers, and—particularly in central and federal government reform—executive agencies, performance standards and measures, increased consumer power, and employment of professional managers and noncareer personnel. Auditing bodies, it is claimed, respond to NPM-type reforms by institutional, procedural, and cultural acclimation. Increasing coproduction of public goods and services by public, private, and nonprofit organizations seems to pose additional challenges to systems of public auditing that are supposed to counter centrifugal tendencies of decentralized agencies and public enterprises.
The conceptual overstretching of auditing is often associated with a debate on the rise of the so-called audit society. An increasing public and academic concern about unethical behavior of public officials, an evaluation-obsessed political and social context, and the observation that modern Western societies would evolve into low-trust societies led observers to conclude that the “audit society” is a way of dealing with this type of neurosis. This diagnosis had its origin in Michael Power’s description of a society obsessed with overseeing almost every domain of public activity and the paradoxical effect that it does not lead to an increase in trust in government. This audit mentality is very often decoupled from its real effects on public sector accountability and has become an end in itself. Auditing is not seen as a rational reaction to the well-defined problem of accountability; rather, the very concept creates, constitutes, and shapes the public perception for which it is a solution. Therefore, by “audit explosion,” Power refers to the growth of audit and related monitoring practices associated with public management reform processes. As a multifaceted concept, the explosion is not only an increment of auditing activities in quantitative terms but also a shift in qualitative perspective, mainly toward the so-called value-for-money audit and other internal control systems. It also means that oversight bodies offshoot into many different fields such as health care and education. The concept of an audit society has been criticized for being too narrowly attributed to the UK or other English-speaking countries, such as Australia or New Zealand, meaning that it does not sufficiently capture the reality of developments in other countries, for example, the United States or Germany.
The Politics of Auditing
Audit institutions do not commonly have the power to set rules or sanction the deviant behavior of auditees. In principle, they lack the capacity to exert direct hierarchical control. This is not undisputed, as the Audit Office of Finland, the Office of the Comptroller General of Chile, and the Court of Audit in Spain are endowed with competencies to prosecute. The Italian Corte dei Conti and the French Cour de Compte also enjoy quasi-judicial powers in administrative matters. Despite these examples, the foundation of their authority in general, however, rests on their constitutionally guaranteed independence from political interference, their professional expertise, the skill to informally cooperate with auditees in order to improve processes, and the ability to ally themselves with like-minded organizations (such as the public accounts committee in parliament) to exercise indirect control. Providing information to other institutions about a specific body’s financial management is the dominant way of exerting influence. The naming and shaming of deviant behavior through the publication of examination results must be seen as ultimo ratio. On one hand, publicizing mismanagement is a powerful lever; on the other, it politicizes their alleged independence as the auditor is drawn into the struggle between political competitors. For this reason, the evaluation of government policies by auditors is a critical matter.
Auditing is per se political in nature. It operates in the nexus of politics and policies. The tension between politicization and institutional independence is permanently felt in the arena of political competition for several reasons. First, the broad legal mandate with the discretion to look into almost any government activity and its potential to unveil, for example, untoward spending practices unwittingly makes the auditor a player within the political game. Second, the nature of the auditing workforce—empowered, well positioned in government, specifically skilled—impels political parties to strategically place favorites. Third, an independent producer of creditable and presumably apolitical information is a highly desirable partner in political arguments. Auditing as a political power or blaming tool is most evident when it is used to detect and deter deviant behavior, such as capitalistic tendencies in communist countries, or to achieve certain policy or partisan objectives. The claim of avoiding policy issues and focusing on the operation of the apparatus is therefore understandable, albeit next to impossible, especially in the context of issues framed not objectively but within the perceptions of political actors.
The principle of the auditors’ independence is definitely a necessary condition for a well-functioning system. Other conditions are more general traits of the political system, such the audit courts’ dependence on the democratic culture of a country, the respect for democratic institutions, the belief in a division of powers, and respectful behavior among those holding power. The main challenge in the development of auditing in modern states is therefore the acceptance of the complementarities of the auditor’s role by relative political actors and the positive use of its potential to improve government operations, ensure good public records, and increase public trust.
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