In the eye of the beholder

I’ve now been at the Office for almost six years. I work with a fantastic group of colleagues who, whatever their role, believe in our vision of contributing towards a high-performing and trusted public sector. We do this by giving Parliament and the public an independent view about public sector performance and accountability. Or, put another way, we provide independent reporting on how your taxes and rates are being spent. We get our independent view by auditing every public entity (about 3700) in New Zealand, including government departments, councils, and schools.

Making sure that the financial statements add up is important – but surely there is more value in public auditing than that? We did some poking around and discovered that there has been very little written about the value of public audit. So we thought we should attempt to better understand the relevance and importance of public auditing to those who rely on our work, such as Parliament and the public. Finding the answer would also guide us in shaping the future of public auditing to help meet our Greatest Imaginable Challenge – using our influence to ensure that by 2025, the public sector is operating and accountable in ways that will meet your needs in the second quarter of the 21st century.

We commissioned some researchers at Victoria University of Wellington to help us look at the value of auditing in the public sector. You can read more about how they carried out this research on our website.

So what did they find? Well, their research showed that the value of public auditing depended on the perspective of the user. In other words, the value of public audit is in the eye of the beholder, so to speak. The researchers discovered six main explanations for the value of public audit:

• The agency (or monitoring) explanation – auditing is valuable because it reduces agency costs. In the public sector, citizens have entrusted assets to the government. The cost for an individual to monitor the use of resources by the government would be too high, and the potential gain too low. Therefore, appointing an auditor helps to reduce the monitoring cost for everybody and ensures the proper use of public resources.
• The signalling explanation – auditing is a way for the government to signal that it is a reliable manager of resources. The government has an interest in ensuring that it is credible when it makes statements about public expenditure or public assets, and that when it makes decisions it is using reliable information. Ensuring that there is a credible independent audit body helps it to do so.
• Governance – auditing is an important part of governance. Without auditing, it would be much harder for good governance to take place. Auditing assists governors by providing assurance over the reliability of the financial statements and bringing issues to their attention. The function of external auditing is complementary to other forms of governance, such as internal audits and audit committees.
• The management control explanation – auditing can help managers run large, complex entities. An audit of a public sector entity is not primarily intended to provide information for an entity’s senior management. However, an audit can provide them with some assurance about what is going on in the remote corners of their entity. Auditing also includes recommendations to help with systems and reporting, and could improve management’s reputation.
• 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).
• The confirmation hypothesis – public sector announcements will be initially accepted by the public at face value. However, the announcements will need to be eventually audited to confirm to the public that the information was reliable.

This, of course, is just a short summary of the findings of what is some very thorough research. If you want to take a deeper dive, you can find the four papers produced by the researchers on Victoria University’s website.

We have also been thinking about how we make our work even more useful and relevant to New Zealanders. We’d like to hear any suggestions you might have on how we can do this in the comments section below.