New Perspectives in Evaluating Internal Audit Performance

Abstract

Defining performance indicators for all internal audit activities is a complex process to highlight the quality of this set of activities. Quality however is not a performance indicator or an additional property added to it, but it belongs intrinsically to the set as a result of the basic solution components properties. This article aims to add to the literature a new set of quantitative and qualitative indicators and also an aggregate indicator characterizing the degree of performance and the practical utility of such analytical tools will be the subject of future research.

Headnote

Abstract

Defining performance indicators for all internal audit activities is a complex process to highlight the quality of this set of activities. Quality however is not a performance indicator or an additional property added to it, but it belongs intrinsically to the set as a result of the basic solution components properties. This article aims to add to the literature a new set of quantitative and qualitative indicators and also an aggregate indicator characterizing the degree of performance and the practical utility of such analytical tools will be the subject of future research.

Keywords: performance, qualitative indicators, quantitative indicators, internal audit

JEL Classification: M410

Introduction

Evaluating the structure of public internal audit would be recommended to be approached from at least three perspectives:

Ø the management or authorising officer;

Ø the internal audit structure ensuring the conduct of public internal audit targeting both the value, cost and quality;

Ø the final beneficiary, namely the citizen, who will consider in the first place the quality of services provided by the public institution.

The optimal allocation of all categories of resources (human, technical, financial) based on both the needs of the internal audit structure and the possibilities of the public institution at a certain time, requires quantifying the quality of the internal audit activity at control system level, both by qualitative and quantitative analysis indicators.

The system of indicators may vary from one type of organizational structure to another but always defines the relationship between entering resources (inputs) and what the organizational structure of public internal audit performs by using these resources (outputs).

In the category of qualitative analysis indicators we enumerate:

Ø the satisfaction level of the final user or the degree of assurance given to citizens,

Ø the acceptance of the results by the Head of the public institution,

Ø the degree of achievement of planned objectives,

Ø the speed reaction of the users from the moment of the provision of information audit,

Ø the effectiveness of the internal audit activity and of internal audit structure,

Ø the accuracy of audit information.

In the category of quantitative analysis indicators we enumerate:

Ø the level of actual costs to achieve planned objectives (cost of an audit intervention, cost of an assurance mission, cost of an advisory mission, the annual cost of internal audit),

Ø productivity of an auditor.

In fact the system of indicators used to date in assessing public internal audit in Romania has a primitive character. For instance here are calculated indicators of quantitative analysis such as: number of audits completed in a certain time, productivity (monthly, half-yearly or annual) of each auditor, productivity (monthly, half-yearly or annual) of the audit service. These indicators find use only in the annual evaluation of auditors and do not necessarily determine the obligation of adopting measures to improve the internal audit activity. In what follows we propose that the indicators system for evaluating internal audit activities to be divided into operational indicators and impact indicators.

Proposed definitions:

1. An operational indicator expresses, in measurable units, the efforts and achieved effects throughout the evaluation process (from planning to formulate recommendations).

2. An impact indicator expresses, in a certain measure, the effects resulting from the completion of the evaluation process (after sending the assessment report).

The category of operational indicators includes:

1) output productivity indicators

Ø the number of audits carried out by the internal audit structure (at a time or in a certain period of time)

Ø the number of audits undertaken by each auditor (at a time or in a certain period of time)

Ø the amount of damage identified by the internal audit structure (monthly, quarterly, half-yearly, annually)

Ø the amount of damage identified by each auditor (monthly, quarterly, halfyearly, annually).

Currently this type of quantitative analysis indicators are used both by management structures for analyzing the audit activity and within audits carried out by the Court of Accounts.

Proposal of output productivity indicators

Indicators expressed in absolute numbers

Ø number of recommendations carried out by the Head of the institution (quarterly, half-yearly, annually),

Ø number of recommendations not carried out by the Head of the institution (quarterly, half-yearly, annually),

Ø number of objectives met by the public institution audited (at a time or in a certain period of time),

Ø amount of damages recovered (at a time or in a certain period of time).

Indicators expressed in relative numbers

Ø share of unimplemented audit recommendations related to audit recommendations implemented by the Head of the public institution (quarterly, halfyearly, annually),

Ø share of implemented audit recommendations related to the total audit recommendations (quarterly, half-yearly, annually),

Ø share of audit recommendations not implemented by the Head of the public institution related to the total audit recommendations (quarterly, half-yearly, annually),

Ø share of damage recovered in the total of damages identified (quarterly, halfyearly, annually).

These indicators may be used in methods of qualitative analysis of the internal audit structure being suited for certain comparative analysis of benchmarking type and for certain "before and after" analyzes type.

2) Output cost indicators

Ø cost of developing a public internal audit,

Ø cost of implementation of a recommendation,

Ø cost of recovery of a damage.

Proposal of indicators of quality level cost of the public internal audit activity:

Ø implementation cost of a unit of information provided (a recommendation) related to the average waiting time to implementation,

Ø the cost of developing a recommendation related to the promptly level of the management of the institution to achieve the recommendation (expressed in units of time), Ø the cost of internal audit related to the quality level of of internal audit activity.

Proposing a cumulative system of indicators in the category of economic efficiency indicators for expenditures made to ensure the level of satisfaction of beneficiaries of the public internal audit activity that involves the cumulated, correlative analysis of the following indicators:

Ø the amount of financial resources used to develop internal audits with satisfaction level assured,

Ø the average number of personnel employed in making audits for a certain period of time,

Ø the amount of financial resources used for auditors' continuing professional training,

Ø personnel expenses related to the total financial resources allocated to an audit activity,

Ø the amount of financial resources allocated for the functioning of audit structure within a certain period of time.

This system of indicators would determine in an analytic form:

Ø the cost of an internal audit activity,

Ø the cost of continuing training for internal auditors,

Ø the cost of an unimplemented recommendation,

Ø the cost of an implemented recommendation,

Ø the utilization of available time,

Ø new equipment purchase costs (hard and software) relative to the examined time,

Ø costs of assets such as fixed assets relative to the examined time.

The category of effectiveness indicators includes:

1) circulating indicators:

Ø degree of coverage within the auditing the audit activities carried out by the public institution,

Ø number of recommendations made by internal auditors,

Ø speed of meeting and/or implementing recommendations,

Ø amount of damage identified and recovered.

Depending on the type of audit (absolute and relative) we have:

- the number of system audit in all audits activities completed within a certain time,

- the number of performance audit in all audits activities completed in a certain time.

Currently this type of quantitative indicators, calculated in relative and absolute values, are used both by management structures for analyzing the audit activity and within auditing activities carried out by the Court of Accounts.

Proposals of effectiveness indicators:

1) indicators of satisfaction of the users of information audit

Ø citizen satisfaction degree in relation to the quality of services provided by the audited public institution,

Ø the satisfaction of the head of the public institution related to the quality of the auditing information requested,

Ø the average waiting time to implement audit recommendations,

Ø the proportion of implemented recommendations in relation to recommendations unimplemented by the public institution management .

2) indicators of use related to the availability

Ø the average usage/implementation of the recommendations related to recommendation quality,

Ø the average promptness provided by users in using recommendations, expressed in units of time,

Ø the average usage/implementation of the recommendations related to average promptness, expressed in units of time,

Ø the availability provided by the internal auditors in advisory work expressed in units of time or number of advisory activities related to a specific period of time (monthly, quarterly, annually).

Proposals regarding the category of impact indicators:

1) indicators for the fulfilment of objectives

Ø achievement of the purpose of creating audited public institution,

Ø fulfilment of the objectives planned in the internal audit activity,

Ø the progress of the scheduled auditing,

Ø the degree of resources used in the level of resources allocated from the budget.

2) indicators of the users of information audit

Ø achievement of objectives by the management of the public institution,

Ø achievement of the objectives by internal auditors through the auditing plan,

Ø coverage of audited area by the audits completed in a period of time,

Ø amount of damages recovered as a result of implementation monitoring,

Ø amount of damages recovered following the external coverage of audit information.

Defining a set of indicators for the assessment of the public internal audit activity represents the first step in quantifying the activity at the control system level but also at the socio-economic system level of the internal audit structure. Given that any activity system is characterized by all the functions, features and useful properties thereof which helps meet social needs we can say that all properties functions which highlight the characteristics of activities to perform the functions for which are designed represent the set of evaluating indicators defined above.

Within evaluating indicators set an important role is held by the performance indicators of the entity that could include indicators proposed above namely those in the impact indicators category. In addition, defining the set of performance indicators should be consistent with the adoption of a global quality indicator of business control system and particularly the structure of internal audit. Thus it can allow the determination of objective criteria for assessing the efficiency and effectiveness of internal audit structures and may lead to quantify these activities and eliminating subjectivity in assessment.

This global quality indicator we propose to be called "quality degree of the objectives fulfilled" that depends on the one hand on the degree of achievement of predetermined goals and secondly on the quality of their implementation. Proposed indicator is in fact the result of a combination of indicators and aims at quantifying internal audit contribution to maintaining and enhancing the prestige of a public entity, its image before the society and to meet the purpose for which it was created.

The quality degree of an objective met can be defined, therefore, through a combination of operational and impact indicators specific to the activity of each public entity. This global indicator provides a usage value for the internal audit activity and expresses in a global manner the quality both scientifically and economically.

Conclusion

The evaluation of the conduct of internal audit activities within an entity can be made for example through the combined use of indicators of quantitative analysis with qualitative analysis indicators. In this way quality means competitiveness and efficiency for both the auditor and the beneficiary/user (management team or citizens) and can express the degree of quality in meeting the objectives of internal audit activities or the degree of quality of the objectives achieved by the public entity. Analyzed as a synthetic indicator it means both determining the competitiveness of the system characterized by these activities compared with similar systems and the efficiency of such activity in the control system analyzed. In these circumstances it results that based on the indicators of quantitative and qualitative analysis can be defined a synthetic and quality cumulative indicator or an indicator of evaluating the performance of economic and social system activities represented by the public entity concerned as a whole but also by the internal audit structure in this case.

References

References

Ghita M., Popescu M., (2006) Auditul intern al institutiilor publice [Internal audit of public institutions], CECCAR Pub. House, Bucarest

Renard J., Teoria si practica auditului intern [Theory and practice of internal audit], (2002) 4th edition, European Union, project financed by Phare and Ministry of Public Finnance,

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