Inside job comes out

Roger Trapp on a new look at internal audit in the public sector

The "expectations gap" has plagued the corporate auditing profession for nearly a decade - ever since the spate of company collapses that announced the end of the Eighties boom called into question the role of auditors. But, whatever problems may stalk accountants in the public sector as their organisations grapple with increasingly commercial environments, auditing has, with a few exceptions, not been widely thought to be among them.

In fact, the Chartered Institute of Public Finance and Accountancy has been aware of difficulties for some time. Its 1992 publication Promoting Internal Audit stressed that internal audit must make sure that it is aware that the needs of customers - that is, individual departments - are of primary importance. The same document emphasised that audit's performance will in the end be judged by the extent to which it has communicated what it is trying to do to the organisation as a whole.

A report published today to coincide with the opening of the Cipfa's annual audit conference claims to confirm that there is a "quality expectations gap" in relation to internal audit in the public services. It points to the finding that 71 per cent of chief financial officers believe that internal audit has an image problem, a view apparently amplified by the rest of the study.

More important, perhaps, are the answers to questions set by Cipfa's audit panel in its quest for more detail about specific areas of concern.

Among these questions are: what are the key variables affecting the quality of audit as perceived by audit providers and the people they serve; how do such variables interrelate?; where does the expectations gap lie; and what are the consequences for auditors, customers and organisations?

The survey, The Nature of Audit Quality, was carried out by Bob Hopkins, of the centre for public sector management at Liverpool John Moores University's Liverpool Business School, and covered 140 organisations and 800 individuals. It demonstrates clearly that in several areas auditors and "auditees", or those being audited, have very different perceptions of the meaning and "quality value" of key auditing concepts. At a more basic level, it says, "there are significant differences of opinion among the groups as to what the primary role of internal audit actually is".

Auditors recognise that that the historical, "probity-centred" role of auditing has been replaced by a positive, forward-looking emphasis on auditing systems and operations. They see themselves as adding value to their organisations through providing appraisal and advice on internal systems, supported by more general business skills.

However, the survey shows that those on the receiving end of audits, particularly non-financial managers, still mainly associate internal audit with finding errors and preventing and detecting fraud. As a result, there is a tendency to view the audit process as "some sort of personal integrity assessment", even though the auditors themselves actively reject that picture.

The divergence extends into views on what needs to be done. The survey uncovered a strong desire among those being audited for greater involvement and consultation at all stages of the process, while auditors themselves were less enthusiastic about that - "probably because of fears about loss of independence". At the same time, auditors put greater importance than auditees on being consulted about changes to organisational systems.

Within that, though, there are different attitudes, depending on age, management level, experience of competitive tendering and method of audit provision. Older managers, for instance, tend to attach greater importance to the probity role than their younger colleagues. The expectations gap is widest in organisations where audit is provided by an external organisation, while both auditors and auditees involved in competitive tendering seemed to be establishing closer relationships and moving away from the old approach.

Mr Hopkins proposes in his report a new role for internal audit, with the traditional focus on compliance with internal controls being superseded by an emphasis on identifying, measuring and controlling weaknesses in organisational effectiveness.

The greatest "organisational risk" for public services, the document suggests, is a failure to deliver "quality" from the resources expended.

Given the findings of the survey, it should be "a natural step to move from the standard audit of routine, mainly financial, systems to the audit of strategic quality mechanisms and control structures", the report says.

Quite how natural, should tax the minds of those gathering in Cardiff over the next couple of days for the audit conference that will feature presentations from Chris Hurford, the audit panel's chairman and associate director of district audit, and Norman Buckley, controller of internal audit at the Inland Revenue.