Research on the value of auditing in the public sector

Auditing in the public sector is an important part of good public sector management and accountability to stakeholders. It is useful therefore to assess from time to time whether the audit function is providing value to stakeholders.

Although auditing and providing assurance are important functions, the benefits can be indirect. This makes studying the value of audit a complex task. In the public sector, it can be particularly complex – some of the benefits of auditing and assurance accrue to the user of the audited information, but the provider of information also benefits from increased credibility. There can also be “information intermediaries” who receive or provide benefits (such as media, interest groups, or other official bodies).

In New Zealand, the standard of public sector accounting and accountability is among the best in the world but there is still room to improve. There’s also a gap between views of the role of auditing and its actual role. Many people misunderstand what an audit does and the assurance it provides.

Why did we commission this research?

There is little recent research on the value of public auditing in general, and on its value in New Zealand in particular. Given the rapidly changing environment in which information is produced and used, we wanted to test – and know how to describe – the value that auditing brings to the public sector.

We commissioned some research work on the topic from Professor Carolyn Cordery (Aston University, UK and School of Accounting and Commercial Law), Professor David Hay (Department of Accounting and Finance, University of Auckland) and in the initial stages, the late Adjunct Professor Kevin Simpkins (School of Accounting and Commercial Law).

How was the research conducted?

The research was commissioned as an independent investigation. The researchers carried out and produced reports on four investigations:

1. An extended literature review of research on the value of auditing in general, including public sector auditing research and private sector auditing research that is relevant to the public sector, and making comparisons between them.
2. Published research on how institutions like the Office of the Auditor-General deliver value.
3. Information about stakeholders obtained from observation of select committee hearings; reviews of documentation about audits and information obtained by the Office of the Auditor-General about stakeholders; and interviews and focus groups.
4. Suggestions for further research.

Greatly simplified, the research identified six main explanations for the value of audit in the public sector:

• the agency (or monitoring) explanation – auditing is valuable because it reduces monitoring costs and helps to ensure that public resources are used properly;
• the signalling explanation – auditing is a way for government to signal that it is a reliable manager of resources, and a credible independent audit helps with this;
• the governance explanation – auditing supports good governance by providing assurance over the reliability of the financial statements and bringing issues to the attention of governing bodies;
• the management control explanation – auditing can help managers to control large and complex organisations;
• the insurance explanation – auditing in the public sector can provide “political insurance” where government can deflect attention on to auditors when there are failings by public sector managers (insurance over financial statements or decisions by managers is not the intended purpose of auditing in the public sector, but auditing may be valued for that reason); and
• the confirmation hypothesis – public sector announcements can be accepted by the public at face value but will eventually need to be audited to confirm that the information was reliable. 

The full set of research papers is available on Victoria University of Wellington’s website.

Page updated: 15 April 2021