Inspire, Implement, Assure—How Internal Auditors Can Leverage the International Framework Good Governance in the Public Sector

Jim Pelletier, Managing Director, Institute of Internal Auditor’s American Center for Government Auditing and Vincent Tophoff, Senior Technical Manager, IFAC | October 11, 2016 |

In 2014, IFAC and the Chartered Institute of Public Finance and Accountancy issued International Framework: Good Governance in the Public Sector to encourage more effective public sector governance. The Framework includes guidance that is applicable to public sector internal auditors—allowing them to inspire, implement, and assure good governance in their organizations.

Purpose of the Framework

Framework is designed to encourage better service delivery and improved accountability by establishing a benchmark for aspects of good governance in the public sector. It is intended to apply to all entities that comprise the public sector. The real challenge for public sector entities, however, remains in the implementation of such codes and frameworks, as it is often their application that fails in practice.

Role of Internal Auditors in Furthering Governance

Internal auditing is a cornerstone of good public sector governance. It is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. Internal auditing helps government organizations accomplish their objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Professional standards require that internal auditors evaluate the design, implementation, and effectiveness of a government organization’s ethics-related objectives, programs, and activities, and that they assess whether the information technology governance of the organization supports the organization’s strategies and objectives. Internal auditors assess and make appropriate recommendations for improving governance processes in:

  • promoting appropriate ethics and values within the organization;
  • ensuring effective organizational performance management and accountability;
  • communicating risk and control information to appropriate areas of the organization; and
  • coordinating the activities of and communicating information among the board, external and internal auditors, and management.

Internal auditing strengthens governance by materially increasing citizens’ ability to hold public sector entities accountable. By providing unbiased, objective assessments of whether public resources are managed responsibly and effectively to achieve intended results, internal auditors help public sector organizations achieve accountability and integrity, improve operations, and instill confidence among citizens and stakeholders. Internal auditors perform an especially important function in those aspects of governance that are necessary for promoting credibility, equity, and appropriate behavior of public sector officials, while reducing the risk of public corruption.

Inspiring, Implementing, and Assurance

To deliver good governance in the public sector, both governing bodies and individuals working for public sector entities, such as internal auditors, must try to achieve their entity’s objectives while acting in the public interest at all times, consistent with the requirements of legislation and government policies, avoiding self-interest and, if necessary, overriding a perceived organizational interest. A number of different elements are required (A-G, below).

A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law

Public sector entities are accountable to legislative bodies for the exercise of legitimate authority in society. This makes it essential that each entity as a whole can demonstrate the appropriateness of all of its actions and has mechanisms in place to encourage and enforce adherence to ethical values and to respect the rule of law.

Role and activities of the internal auditor: Public sector internal auditors are expected to recognize and report corruption, negligence, or abuse of authority. Based on the perceived level of risks associated with specific government programs, internal auditors perform compliance audits to help ensure adherence with applicable laws, regulations, policies, procedures, and codes of conduct. They review the accuracy and completeness of government reporting to help ensure that government entities can demonstrate the appropriateness of their actions, and they review information from contractors and other parties doing business with government organizations to help ensure ethical practices in procurement, contracts, and other business arrangements.

B. Ensuring openness and comprehensive stakeholder engagement

As public sector entities are established and run for the public good, their governing bodies should ensure openness in their activities. Clear, trusted channels of communication and consultation should be used to engage effectively with all groups of stakeholders, such as individual citizens and service users, as well as institutional stakeholders.

Role and activities of the internal auditor: Internal audit reports are relied on by stakeholders as a source of independent, unbiased information regarding government programs. Legislators and regulators use the information in internal audit reports to help assess operations, establish budgets, and set public policy.

C. Defining outcomes in terms of sustainable economic, social, and environmental benefits

The governing body should ensure that its decisions further the entity’s purpose, contribute to intended benefits and outcomes, and remain within the limits of authority and resources. Input from all groups of stakeholders, including citizens, service users, and institutional stakeholders, is vital to the success of this process and in balancing competing demands when determining priorities for the finite resources available.

Role and activities of the internal auditor: Internal auditors perform a variety of important roles in reviewing the sustainability of economic, social, and environmental benefits. Audits are planned to help understand and assess the impact of activities, products, and services, as well as to ensure intended outcomes have been achieved and can be sustained. These audits systematically evaluate organizational objectives and targets, assessing whether targets have been achieved and evaluating risks that may threaten future sustainability. Audits can also be designed to evaluate the continuity of government services and to ensure government officials are operating within their appropriate limits of authority and resources.

D. Determining the interventions necessary to optimize achieving intended outcomes

Public sector entities need robust decision-making mechanisms to ensure that their defined outcomes can be achieved in a way that provides the best trade-off between the various types of resource inputs while still enabling effective and efficient operations. Decisions made need to be reviewed continually to ensure that achieving outcomes is optimized.

Role and activities of the internal auditor: Internal auditors routinely evaluate and make recommendations for improving internal controls and risk management processes designed to optimize achieving intended outcomes. Performance audits focus on improving how government organizations provide programs and services, offering independent examinations of the efficiency and effectiveness of government undertakings, programs, or organizations.

E. Developing the entity’s capacity, including the capability of its leadership and staff

Public sector entities need appropriate structures and leadership, as well as people with the right skills, appropriate qualifications, and mindset, to operate efficiently and effectively and achieve their intended outcomes within the specified periods.

Role and activities of the internal auditor: Internal auditors review human resources policies, succession plans, training programs, performance review criteria, and other policies and procedures to help ensure that people with the right knowledge, skills, and abilities are available to fulfill the organization’s strategic plans, goals, and objectives. They evaluate physical facilities and other assets to help guarantee that the entity will have the capacity to achieve intended outcomes without unplanned interruptions in service. They also review contracts, procurement practices, budgets, and other information to help ensure that essential resources and supplies are available as needed within specified timeframes.

F. Managing risks and performance through robust internal control and strong public financial management

Risk management and internal control are important and integral parts of a performance management system and crucial to achieving outcomes. They consist of an ongoing process designed to identify and address significant risks involved in achieving an entity’s outcomes. A strong system of financial management is essential for the implementation of public sector policies and achieving intended outcomes, as it will enforce financial discipline, strategic allocation of resources, efficient service delivery, and accountability.

Role and activities of the internal auditor: Government internal auditors assist their organizations in maintaining effective controls by evaluating the effectiveness and efficiency of controls and by promoting continuous improvement. Professional standards require that they evaluate the adequacy and effectiveness of controls regarding:

  • achieving the organization’s strategic objectives;
  • reliability and integrity of financial and operational information;
  • effectiveness and efficiency of operations and programs;
  • safeguarding of assets; and
  • compliance with laws, regulations, policies, procedures, and contracts.

Internal auditors are also charged with evaluating the effectiveness of risk management processes and contributing suggestions for their improvement. In fulfilling this role, they assess whether or not:

  • organizational objectives support and align with the organization’s mission;
  • significant risks are identified and assessed;
  • appropriate risk responses are selected that align risks with the organization’s risk appetite; and
  • relevant risk information is captured and communicated in a timely manner across the organization, enabling staff, management, and the board to carry out their responsibilities.

G. Implementing good practices in transparency, reporting, and audit to deliver effective accountability

Effective accountability is concerned not only with reporting on completed actions, but also ensuring that stakeholders are able to understand and respond as the entity plans and carries out its activities in a transparent manner. Both external and internal audit contribute to effective accountability.

Role and activities of the internal auditor: Internal auditing materially increases citizens’ ability to hold public sector entities accountable by providing unbiased, objective assessments of whether or not public resources are managed responsibly and effectively to achieve intended results. Accountability audits assess how government entities manage, use, and safeguard public resources, evaluating whether there is reasonable assurance that government officials act responsibly an in adherence to applicable laws, regulations and policies. Internal auditors also review records to help ensure that public funds are accounted for appropriately and controls are in place to protect public resources from misappropriation and misuse.

Call to Action

Public sector internal auditors can enhance their organizational governance by leveraging the International Framework Good Governance in the Public Sector. As a next step, we call upon internal auditors, as well as those who rely on the work of the internal auditor or are otherwise affected by internal audit (or the lack thereof!), to provide their view on how internal auditors could further governance in public sector entities. Please let us know what you think!

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