Executive Summary
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Almost every audit can also be an operational or performance audit.
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With a bit of creativity, it is not too difficult to include a value-adding element to a compliance or financial audit.
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Operational and performance auditing can provide added value to your organization.
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Including an operational or performance auditing element in your audits can enhance the image of auditing for those being audited and also for management.
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Auditors can increase their job satisfaction through operational and performance auditing.
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The 3Es of economy, efficiency, and effectiveness should be integral components of the internal auditor’s work.
Introduction
“The truth is, “audit gets no respect.” Quite frankly, if the audit department in question is using yesterday’s approach in today’s company, has not manoeuvred top management and the board into focusing on the company’s top five or ten risks, has not caused management to quantify these risks, and has not succeeded in developing authorized bounds of risk tolerance, then it doesn’t deserve any respect.” Larry Small, President, Fannie Mae, 2000.
This is a great quote, but what a pity it was not applied in recent times when this company got into serious financial difficulty. Perhaps a greater focus on operational and performance auditing might have helped.
What are the big risks for management? Are they likely to be immaterial accounting mistakes, a missing signature on a form, an immaterial asset that cannot be located, people not following a procedure exactly, or perhaps petty cash missing?
Or maybe management is more concerned with making sure the organization is running properly, which means focusing on economy, efficiency, and effectiveness—better known as the 3Es.
Operational and Performance Auditing
What is the difference between operational and performance auditing?
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Operational audit. Sometimes called program or performance audits, these examine the use of resources to evaluate whether those resources are being used in the most efficient and effective ways to fulfill an organization’s objectives. An operational audit may include elements of a compliance audit, a financial audit, and an information systems audit. This term is mainly used in the private sector.
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Performance audit. This is an independent and systematic examination of the management of an organization, program, or function to identify whether the management is being carried out in an efficient and effective manner and whether management practices promote improvement. This term is mainly used in the public sector and may be the same as or similar to an operational audit.
While there may be purists who will argue there is a difference, the reality is that they seek to achieve the same objective. Although operational and performance auditing are generally applied to public sector auditing, and operational auditing is usually applied to private sector auditing, both seek to achieve organizational improvement of the 3Es.
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