Definition
Governments and government departments in democratic societies are subject to internal audit. This is essential to assess whether the departments are run efficiently and provide good value for taxpayers’ money.
The UK government’s internal audit standards (HM Treasury, 2011) define internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. Its scope is to help an organization to accomplish its objectives by bringing a systematic, disciplined approach to the evaluation and improvement of the effectiveness of risk management, control, and governance processes.
Internal auditors must be independent from the public sector that they audit in order to be able to provide impartial audit review and advice. This means that the process of appointing public auditors must be well regulated and impartial. Usually this is regulated by law; however, in the public sector the appointment of internal auditors is usually a decision for management or the audit committee.
The auditing process in the public sector has a wide remit. The scope of the internal audit work will usually focus on:
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reviewing the achievement of objectives;
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making sure decisions are properly authorized;
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assuring the reliability and integrity of information;
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promoting efficiency and effectiveness;
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safeguarding assets;
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assessing compliance with laws, regulations, policies, and contracts;
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reviewing the opportunities for fraud.
Advantages
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Internal auditing of public sector organizations and government departments is a necessary process that provides an insight into how the public sector is run.
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It provides an assessment of the resource budget estimates that in turn helps a government department to meet its published aims and objectives.
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It offers consultancy advice in the form of recommendations that management are free to accept or reject.
Disadvantages
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Regulations and statutes can make the internal auditing of public sector departments lengthy and complicated.
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Since many departments are concerned with vital public services, subjecting them to internal audit can be disruptive and can create difficulties with line management if the function, objectives, and ultimately the benefits of internal audit are not understood by department personnel.
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Unless the internal audit function is properly trained, with a full understanding and appreciation of the department that is being audited, its judgments will be challenged by line management. Proper training is essential.
Action Checklist
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Ensure that internal auditors are appointed in full compliance with the relevant legislation.
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Make sure that the auditors appointed have no connection or conflict of interest with the public sector they will investigate.
Dos and Don'ts
Do
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Set up a transparent and clear process which the public can easily consult.
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Make sure that the principles of independence of public sector auditors, propriety of auditors, and providing good value for money are achieved.
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Make sure that the internal audit process is supervised by an independent watchdog such as the Audit Commission in the United Kingdom or equivalent.
Don’t
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Don’t ignore the importance of public sector auditing. It may seem expensive, but it will provide value for money in the long term.
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Don’t appoint auditors that have any connection with the public sector in question; otherwise the impartiality of the audit function will be put at risk.
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