Auditing of Efficiency

2. Understanding Efficiency Concepts

What is Efficiency?

02.     In essence, efficiency indicates how well an organization uses its resources to produce goods and services. Thus, it focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which inputs are used to produce or deliver the outputs. To understand fully the meaning of "efficiency", it is necessary to understand the following terms: inputs, outputs (including quantity and quality), productivity, and level of service.

  • Inputs are resources (e.g., human, financial, equipment, materiel, facilities, information, energy and land) used to produce outputs.
  • Outputs are goods and services produced to meet client needs. Outputs are defined in terms of quantity and quality and are delivered within parameters relating to level of service (see Figure 1).
  • Quantity refers to the amount, volume, or number of outputs produced. For example, number of passports issued, number of income tax returns processed, number of applicants selected as immigrants, and area of facilities maintained.
  • Quality refers to various attributes and characteristics of outputs such as reliability, accuracy, timeliness, service courtesy, safety, and comfort.
    • Productivity is the ratio of the amount of acceptable goods and services produced (outputs) to the amount of resources (inputs) used to produce them. Productivity is expressed in the form of a ratio such as cost or time per unit of output.
    • Level of service refers to the "richness" of service in terms of such characteristics as accessibility, options, frequency, and response time. Level-of-service standards are sometimes defined by statute, regulations, or policies. Such standards may influence quality as well as the cost of service.

03.     Staff and work processes, among other factors, determine the rate at which resources are consumed in producing goods or services. Thus, staff and work processes affect the productivity of an operation.

04.     Efficiency is a relative concept. It is measured by comparing achieved productivity with a desired norm, target, or standard. Output quantity and quality achieved and the level of service provided are also compared to targets or standards to determine to what extent they may have caused changes in efficiency. Efficiency is improved when more outputs of a given quality are produced with the same or fewer resource inputs, or when the same amount of output is produced with fewer resources. These relationships are illustrated in Figure 2.

How does efficiency relate to economy and effectiveness?

05.     Efficiency is only one dimension of the performance of a government program or operation. Auditors should be equally aware of other dimensions of performance, including economy and effectiveness.

06.     Due regard to economy requires that resources of appropriate quantity and quality be obtained at least cost. Because efficiency derives from the relationship between resource inputs and outputs, the concepts of efficiency and economy are inextricably linked. Economic acquisition of resources contributes to efficiency by minimizing the cost of inputs used.

07.     Effectiveness questions overlap with and extend beyond efficiency into program effects and impacts (outcomes). Efficiency is closely linked to effectiveness because it is an important factor in determining the least-cost method of achieving desired outcomes.

08.     How economy, efficiency, and effectiveness are interrelated is displayed in Figure 3.

Auditing operations with non-uniform outputs

09.     Government operations cover a wide variety of work ranging from repetitive clerical tasks to complex intellectual analyses, and from manual tasks to automated operations using expensive equipment and technology. Efficiency of some operations with dissimilar outputs can be difficult to measure. Examples of such operations include planning, policy development, research, advisory support functions, administrative overhead, and project management.

10.     Measurable operations have many features in common with difficult-to-measure operations. For example, both types of operations have to be planned, budgeted, operated, monitored, and controlled. Usually, all operations have clients who receive a service or product. The main difference is in the difficulty of measuring and assessing efficiency based on output/input ratios.

11.     The manager's obligation to be prudent in the use of resources is pertinent to all operations, including those where efficiency is difficult to measure. All audit-worthy operations, regardless of the difficulty of measuring their efficiency, should be examined to determine whether management has demonstrated due regard to efficiency.

12.     Where the efficiency of an operation is difficult to measure, auditors are expected to verify whether the controls, operational processes, and work methods are appropriate for minimizing resource inputs in the delivery of required goods and services or maximizing output with given resources. The following are a few examples of activities that auditors can consider as evidence of management's due regard to efficiency:

  • Carrying out periodic reviews to eliminate redundant operations and intermediate or internal outputs that do not contribute to the organization's final outputs (e.g., administrative and overhead functions, useless reports).
  • Using project management information covering milestones reached versus those planned, actual dates versus target dates, and resources used versus those budgeted.
  • Comparing the total and component costs of operations (including overhead) with costs in other similar organizations.
  • Reducing layers of control, speeding up decision making, and creating more shared services.
  • Rationalizing products and services to better serve the needs of internal and external clients, and discontinuing outputs that are no longer needed.
  • Reducing operational costs by contracting out work, when justified.
  • Improving the quality and level of service to satisfy user demand without increasing costs.
  • Developing better systems and work methods, including appropriate use of technology.
  • Improving staff productivity through such things as better equipment, training and development, improved working conditions, incentives, and recognition of good performance.
  • Identifying new opportunities to apply best practices based on appropriate comparisons with other departments, other jurisdictions, or the private sector.
Measuring efficiency

13.     Efficiency information is necessary for management to determine whether the level of efficiency achieved meets an acceptable standard. It is also necessary for comparing efficiency levels before and after corrective action.

14.     Efficiency and associated factors usually can be measured and monitored best using a family of indicators focusing, for example, on various aspects of quantity, quality, and level of service. The purpose of using a family of indicators is to understand how related operational factors influence the efficiency of an operation. The related factors can then be controlled to improve efficiency.

15.     Measuring inputs. Inputs (e.g., labour, materiel, or capital) can be measured in either physical or monetary terms. Labour inputs, for example, can be measured in units of time or dollars. Materiel and capital resources are generally measured in dollars.

16.     Measuring outputs. Outputs of some operations are uniform. These outputs can be readily counted and the amount of resources consumed can also be measured to calculate the efficiency of producing them. If outputs are not uniform, it is not appropriate to count them as standard units of production requiring equal amounts of resources for calculating efficiency.

17.     Standards for efficiency. Standards provide a reference point or benchmark to measure and assess efficiency. Different kinds of standards can be used as benchmarks so long as they represent a reasonable level of expected efficiency.

  • Engineered standards. These are developed with well-established work measurement techniques. Therefore, engineered standards provide a reliable basis for measuring and assessing efficiency levels.
  • Historical standards. Productivity ratios, representing efficiency achieved in the past, can be used as a base to assess current efficiency levels.
  • Organizational comparisons (benchmarking). Comparing against standards based on the achievements of other organizations that are doing similar work and are considered leaders in the field, or comparing with the generally accepted industry or business standards are other ways of assessing an organization's efficiency.
  • Capacity utilization. The efficiency of staff, equipment, and facilities, etc., is strongly influenced by the extent to which such resources are used productively in relation to the time available for use. Utilization is expressed as the percentage of the available capacity that is actually used.