Not All Government Audits Are Created Equal

Exploring the differences between Financial Audits and Performance Audits

Last week, this publication took a first look at one of the most interesting and fascinating efforts to reform government that has taken place in at least a generation: The Department of Government Efficiency.

And while, DOGE isn’t officially a department of the federal government, it certainly has gained a lot of attention both inside and outside Washington, DC. Throughout the country, it has not been an uncommon refrain to hear that state and even local governments need to have their own DOGE efforts, with residents making demand to have audits of government departments.

And while audits are good, they aren’t exactly the panacea most believe that they are. In fact, the audit concept is actually pretty broad and, at least in local government, there are two specific types of audits that take completely different look at how government operates.

Financial Audits: Ensuring Fiscal Integrity

Financial audits are the cornerstone of financial accountability in local government. These audits primarily focus on examining an organization's financial statements and records to ensure that public funds are spent legally and managed in accordance with generally accepted accounting principles. The primary goal of a financial audit is to render an opinion on whether the financial reports are presented fairly and accurately, in conformity with applicable accounting standards.

During a financial audit, auditors meticulously review financial transactions, accounting practices, and internal controls. They assess whether the organization has complied with relevant laws and regulations related to financial matters. This process involves examining supporting documentation, testing transactions, and evaluating the overall financial reporting system.

The outcome of a financial audit is typically an auditor's report that expresses an opinion on the fairness and accuracy of the financial statements. This report is crucial for stakeholders, including taxpayers, creditors, and other government agencies, as it provides assurance about the reliability of the financial information presented by the local government entity.

Financial audits serve several important purposes. They help detect and prevent fraud, ensure compliance with financial regulations, and provide a basis for informed decision-making by government officials and the public. Moreover, they contribute to maintaining public trust in government financial management and transparency.

Performance Audits: Enhancing Efficiency and Effectiveness

While financial audits focus on the accuracy of financial reporting, performance audits take a broader view of government operations. These audits examine the efficiency and effectiveness of government programs and operations, aiming to improve overall performance and provide better value for taxpayers' money.

Performance audits are guided by the principle of the "Three E's": Economy, Efficiency, and Effectiveness. Economy refers to keeping costs low while maintaining quality. Efficiency focuses on getting the most out of available resources, often measured by the ratio of outputs to inputs. Effectiveness examines whether program objectives or goals are being met and to what degree.

In conducting a performance audit, auditors may employ a variety of methodologies, including data analysis, interviews, surveys, and benchmarking against best practices. They often delve into areas such as program design, resource allocation, operational processes, and outcome measurement.

The results of a performance audit typically include findings and recommendations for improvement. These might suggest ways to streamline processes, reduce costs, eliminate redundancies, or enhance service delivery. Unlike financial audits, which primarily look backward at past financial transactions, performance audits often have a forward-looking orientation, providing insights that can guide future decision-making and strategic planning.

Performance audits can be particularly valuable in identifying opportunities for cost savings, improving service quality, and increasing overall government effectiveness. They provide a mechanism for continuous improvement in government operations and can help address systemic issues that may not be apparent through financial audits alone.

The Ohio Auditor's Office: A Case Study in Comprehensive Auditing

In Ohio, the State Auditor’s Office has the responsibility for auditing local governments and the office provides an excellent example of how both financial and performance audits are utilized in practice. Primarily, this office is responsible for conducting financial audits of all public entities in Ohio, including state agencies, local governments, and school districts. These audits ensure that public funds are properly accounted for and that financial reports accurately reflect the entity's financial position.

In addition to its financial audit responsibilities, the Ohio Auditor's Office has embraced the value of performance audits through its Ohio Performance Team (OPT). This team has conducted over 400 performance audits since 1995, identifying potential savings of over $187.3 million. These audits have covered a wide range of government entities and programs, providing valuable insights and recommendations for improvement.

The performance audit function of the Ohio Auditor's Office is particularly noteworthy. Performance audits can be initiated at the request of government entities, by mandate from the Ohio General Assembly, or in cases of fiscal distress for school districts. This flexibility allows the office to address specific concerns or challenges faced by various public entities.

The broad authority of the Ohio Auditor's Office to audit any governmental entity, program, activity, or function underscores the comprehensive nature of its oversight role. This authority enables the office to examine not just financial transactions, but also the underlying systems, processes, and decisions that drive government operations.

Recent legislation in Ohio aimed to expand the number of performance audits conducted on state agency programs. This legislative action reflects a growing recognition of the value that performance audits can bring to government operations. By increasing the frequency and scope of these audits, Ohio aims to identify more opportunities for improvement and cost savings across its state agencies.

The Ohio Auditor's Office views performance audits as a valuable tool for improving government operations and providing taxpayers with better value for their money. These audits go beyond simply identifying problems; they offer practical recommendations for enhancing efficiency, effectiveness, and economy in government operations.

Complementary Roles in Government Accountability

While financial and performance audits serve different primary purposes, they are complementary in promoting overall government accountability and effectiveness. Financial audits ensure the accuracy and reliability of financial reporting, which is crucial for maintaining public trust and making informed financial decisions. Performance audits, on the other hand, focus on the broader aspects of government operations, seeking to improve efficiency, effectiveness, and value for money.

Together, these two types of audits provide a comprehensive picture of government operations. Financial audits ensure that resources are properly accounted for, while performance audits help ensure that these resources are used effectively to achieve desired outcomes. This dual approach to auditing helps create a more transparent, efficient, and effective government that is responsive to the needs of its citizens.

Both financial and performance audits play vital roles in ensuring the proper functioning of local governments. While financial audits focus on the accuracy and compliance of financial reporting, performance audits examine the efficiency and effectiveness of government programs and operations. The Ohio Auditor's Office exemplifies how these two types of audits can be effectively combined to provide comprehensive oversight and drive continuous improvement in government operations.

As governments face increasing pressure to do more with limited resources, the insights provided by both financial and performance audits will continue to be invaluable in guiding decision-making and enhancing public service delivery.

What Do You Think?

Does your local government need a performance audit? Answer our poll above and also our paid subscribers are more than welcome to leave their thoughts and ideas in the comment thread.

Of course, longer pieces are always welcome. If you want to share your thoughts without the limits of word counts and paywalls, you can always send your writing to pinnaclestrategiesltd@gmail.com and it will be run in a future edition of Civic Capacity.

Tell Us How You Feel About Your Community!

Our reader survey for this month is looking for responses! Feel free to share your thoughts and ideas on your hometown! You can access the survey here: https://www.surveymonkey.com/r/PF6SPPN

Check out our New YouTube Channel!

Our goal with the Civic Capacity YouTube Channel is to be a centralized location where residents can watch videos of local government meetings in action and also provide comments and insights. You can check out the channel here!

You Can Help Support This Work!

Our readers and subscribers have been asking for a new way to support the work being done here at Civic Capacity! Some of our readers do not like the idea of having to sign up for another subscription service. Some of our subscribers occasionally want to give more support through a one-time transaction.

Civic Capacity is partnering with “Buy Me A Coffee” to give our readers, subscribers and friends an opportunity to give one-time support to Civic Capacity. Personally, I don’t like coffee, but I will never turn down a nice iced tea. If you feel compelled to support this effort, just click the button below.

Thanks for reading today’s Civic Capacity Newsletter! Please feel free to share this information with your friends and neighbors.

Also, please consider subscribing to our work. If you are a free subscriber, please consider becoming a paid subscriber. For less than $1 a week, you can get timely and conversational updates about the decisions that are impacting you and your community!