| Written by Mark Funkhouser,
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The idea that the audit function is supposed to add value to the jurisdiction it serves has become broadly accepted in the government audit community. When you say publicly to other auditors that audit must add value, heads nod gravely in assent. But privately, I believe, the idea mostly frightens auditors. And in some quarters the idea of audit adding value has begun to be transformed into something like “if it adds value it must not be audit” and we find folks wanting to call what we do something other than auditing.
So, how does audit add value to the organization? Before answering this question, I want to consider the elemental nature of audit and the organizations in which it is practiced, because it is from this that my answer is derived. The basic components of all audits are independence, verification and third-party reporting. This can be done well or it can be done poorly, but if this is what is being done then the work is auditing and if it is not is being done then the work is not auditing. It doesn’t matter whether the people are trained as accountants. Thirty thousand years of human experience has indicated that it is vitally important that someone be doing this, particularly in large and powerful organizations and especially if those are government organizations.
Independence means in the context of a principal-agent relationship where a principal hires or appoints an agent to carry out the operations of the organization. The auditor must be independent of the agent, must verify through the systematic examination of evidence the work of the agent and perhaps the results of that work, and must issue reports to the principal for whom the agent is working. The principal-agent relationship is different when the principals are those who have ownership responsibility for the organization and must exercise broad policy setting powers than it is when it involves as the principals those with command and control responsibility for the operations of the organization within the broad policy confines laid down by the owners. In the first case the auditor reports to and works for the board, in the second, the auditor reports to and works for top management. We typically call the latter “internal auditing” but it is important to recognize that in both instances the auditor is independent of the agent.
As government auditors, we all work for what Comptroller General David Walker calls “accountability organizations”. Our basic objectives are different than auditors who work for commercial auditing firms or private businesses. I recently heard a speech by Mr. Walker in which he made the point that we have “a duty of loyalty to the greater good” and that private sector firms (such as, for example, commercial accounting firms) have no such loyalty. Their objectives are to expand markets and increase profits. Our objectives are to help the governments we serve become governments to trust and respect. Governments that on the one hand can be expected to choose just and moral outcomes and on the other can be expected to be competent enough to generally achieve the outcomes they choose.
Researcher David Wallin has studied how financial auditing adds value. He found that agents are likely to produce more when assured of being paid for what they produce and principals are more likely to pay more when assured of what they’re getting. Auditing allows for both of these situations to be more likely. In Wallin’s work, he found that the value of the entire enterprise was thus increased. Consider citizens as principals and government managers as agents, and consider the benefits of broader based discussions of problems that can result from our work, allowing multiple points of view. And consider how new insights and facts can thus be added to the discussion of problems.
I read recently that there are more democratic governments in the world today than ever before in history. Democracy works, and one of the reasons it works is that all of us are smarter than any of us. Auditors are independent, analytical, and knowledgeable about operations at a detailed level. Audit adds value to democratic government by using its unique strengths to develop and diffuse information about problems and potential solutions.
Mark is City Auditor of Kansas City, Missouri and a regular columnist for the LGAQ
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Funkhouser on Auditing