Auditing of Efficiency

3. Auditing of Efficiency in Departments and Agencies

Objectives and scope of efficiency component of VFM audits

18.     Efficiency is usually but one element in a VFM audit of a program, activity, or operation. In some cases, however, efficiency can be the main focus of the audit because of its importance to achieving an operation's objectives. All significant variables that influence the relationship between the resources an organization uses and the goods or services it produces should be considered in determining the scope of audits examining efficiency issues.

19.     The objectives of auditing efficiency can include assessing one or more of the following:

20.     Auditors should consider the overall scope of a VFM audit as well as its reporting themes and strategy in determining the audit objectives of its efficiency component.

Benefits of auditing efficiency

21.     Auditing efficiency enables the OAG to inform Parliament whether departments and agencies manage resources with due regard to efficiency. It can also directly or indirectly help departments and agencies to identify opportunities to provide more or better services at the same or lower cost. More specifically, such audits can:

Audit criteria

22.     The four main criteria and several sub-criteria used to assess whether resources are managed with due regard to efficiency are grouped into four broad areas of management responsibility; these are listed below and displayed in Figure 4.

A.       Efficiency Achievement Information

B.       Improving Efficiency

C.       Management Systems and Practices

D.       Work Environment

23.     The criteria and sub-criteria provide a general framework to guide the auditor in examining the processes and factors critical to achieving and maintaining efficiency. They are not intended to provide a prescriptive model to tell managers how to manage their operations under all circumstances.

24.     The full range of sub-criteria presented below may not apply to all organizations and programs. Judgment must be used to decide which audit approach (e.g., results or systems-based or a combination of both approaches), and which audit sub-criteria best apply to a particular audit, given its scope, objective and strategy, as well as the characteristics of the audit entity.

25.     A results-based audit approach may be supported with a selective examination of a few critical systems to verify the reliability of available information on efficiency. Where the level of efficiency achieved by the audited operation is not satisfactory, more audit work may be required to find the causes for inefficiency. Such information would help to explain and support negative audit findings, and to make appropriate recommendations for corrective action. Where efficiency is satisfactory, relatively less audit work would be required.

26.     In cases where results are difficult to measure or reliable information is not available, a systems-based audit approach may be appropriate. The purpose is to determine whether the existing systems and practices are consistent with achieving efficiency. The particular approach chosen will influence the selection of sub-criteria for the audit.

27.     This audit framework, with the exception of a couple of sub-criteria related to the measurement and use of productivity ratios, applies to all types of operations, including those where outputs are difficult to measure.

Figure 4

Areas of management responsibility
Addressed by efficiency audit criteria

A.    Efficiency Achievement Information

  1. Efficiency of measurable activities
  2. Efficiency of difficult-to-measure activities
  3. Quality/level of service indicators
  4. Utilization of resource activity
  5. Reporting and using efficiency information

B.    Improving Efficiency

  1. Delivery alternatives
  2. Improving existing methods of operations
  3. Use of technology and automation
  4. Continuing efforts to reduce the cost of inputs

C.    Management Systems and Practices

  1. Strategic plans
  2. Operational plans
  3. Budgets and resource allocation
  4. Operating systems and procedures
  5. Monitoring and controlling operations

D.    Work Environment

  1. Efficiency as a priority
  2. Focus on clients and service
  3. Accountability
  4. Encouragement and recognition of performance
  5. Training and development
  6. Operating in the context of collective agreements

Criterion A. Efficiency Achievement Information

28.     Valid and reliable information on efficiency should be used to monitor, maintain, improve and report on efficiency.

Sub-criteria
  1. Efficiency of measurable activities. Output/input ratios (unit costs, units per person-year, etc.), reflecting the amount of resources used to produce uniform and quantifiable outputs of goods and services, should be satisfactory in comparison with appropriate targets and standards.
  2. Efficiency of difficult-to-measure activities. To achieve efficiency in operations without uniform or quantifiable outputs, project management information should be used, where appropriate, that covers milestones reached vs. those planned, actual dates vs. target dates, and resources used vs. those budgeted. The ratio of overhead cost to total operating cost also should be monitored.
  3. Quality and level-of-service indicators. The quality and level of service achieved should be satisfactory in comparison with appropriate standards and targets that balance costs and reasonable expectations of clients.
  4. Utilization of resource capacity. Optimum use should be made of available capacity of production facilities, equipment, and employees to produce targeted volumes of goods and services.
  5. Reporting and using efficiency information. Relevant, timely, reliable, and complete efficiency achievement information should be reported for evaluation, strategic decision making, and accountability. Appropriate corrective action should be taken promptly.
Criterion B. Improving Efficiency

29.     Opportunities and innovative ideas for improving efficiency should be explored continuously and exploited as appropriate.

Sub-criteria
  1. Delivery alternatives. The feasibility of using other delivery methods to improve efficiency should be examined, including contracting out.
  2. Improving existing methods of operations. There should be continuous examination of the feasibility of streamlining current systems and procedures, eliminating duplication and waste, and simplifying work processes and practices. This should be done with due regard to cross-functional impacts on the efficiency of the whole organization and on total costs.
  3. Use of technology and automation. Opportunities for the use of information technology and the automation of manual operations should be continuously explored, and, where appropriate, exploited to reduce monotony and error level, to increase productivity, and to provide better service to clients.
  4. Continuing efforts to reduce the cost of inputs.
  1. Make/buy/lease or other options to reduce the cost of inputs, while maintaining their quality, should be reviewed.
  2. Program overhead and administrative support functions should be minimized through conducting a needs analysis, sharing common services, re-engineering operational processes, and restructuring organizations — both to reduce layers of management and to speed up decision making.
Criterion C. Management Systems and Practices

30.     Management controls, operational systems, and work processes and practices should demonstrate due regard to efficiency.

Sub-criteria
  1. Strategic plans. Long-term strategic plans should demonstrate due regard to efficiency, among other priorities. Planning should include recognizing the risks and consequences of inefficient operations, determining the feasibility of switching to less costly methods, rationalizing the range of goods or services provided, and restructuring the organization, where appropriate, to function more efficiently.
  2. Operational plans. Annual operational plans should be based on sound principles of risk management, on efficient work methods and procedures, and on rational standards for output quantity, quality, and level of service.
  3. Budgets and resource allocation. Annual operating budgets should be calculated using performance standards (e.g., output/input ratios) so that resource levels are appropriate for the planned volume of outputs. They should be based on the use of resources (human, financial, materiel, equipment, etc.) of appropriate quantity and quality, acquired at a price that will enable the organization to carry out its operational plan at minimum cost. Resources should be allocated rationally among organizational elements to optimize efficiency, among other considerations.
  4. Operating systems and procedures. Operations should be designed and carried out using efficient systems, processes, procedures, and work methods, and with skilled staff who know what is expected of them.
  5. Monitoring and controlling operations. Operations should be scheduled, supervised, and monitored. As necessary, timely corrective action should be taken, based on progress reports, to meet targets on time and within budget.
Criterion D. Work Environment

31.     A managerial and work environment that emphasizes efficiency and in which managers and staff are appropriately empowered and committed to achieving this should exist.

Sub-criteria
  1. Efficiency as a priority. It should be emphasized that efficiency is a priority and that achieving it is a shared responsibility of managers and staff.
  2. Focus on clients and service. The policy and practice at all levels should be to provide high-quality goods and responsive services to the public and other clients.
  3. Accountability. Roles, responsibilities, authority, and accountability for efficiency matters should be defined clearly and communicated to those concerned.
  4. Encouragement and recognition of performance. Incentives should be used, as appropriate, to encourage managers and staff to improve efficiency; their efforts and achievements should be recognized and rewarded appropriately.
  5. Training and development. Managers and staff should be provided with appropriate training and development opportunities for continuing to improve productivity and quality in serving clients.
  6. Operating in the context of collective agreements. Efforts to attain efficiency should take into consideration the related provisions of collective agreements.