AUDITING
IN PERSPECTIVE: REGULATORY TOOL, MORIBUND REMEDY OR
DEMOCRATIC CHAMPION?
Abstracts of Presentations
for Workshop to be held at the Innovations Building,
Australian National University, on 6 February 2003
KEYNOTE
ADDRESS: EVALUATING THE AUDIT EXPLOSION.
Professor
Mike Power, Centre for Analysis of Risk and Regulation,
London School of Economics
This paper reviews the claim that there has been an
audit explosion in recent years. The argument seeks
to refine the audit explosion ‘hypothesis’
in terms of its institutional and behavioural effects,
and in terms of its causes and consequences. It remains
the case that the most significant behavioural consequences
of the audit explosion are empirically elusive. In addition,
a framework for greater comparative sensitivity is developed,
both in cross-national and cross-sectoral terms, which
focuses on variation in the knowledge base, formal organisation
and operational process dimensions of auditing. Finally,
a preliminary framework for evaluating the design of
auditing practices is developed which could inform a
post-Enron critical discussion of both the problems
and the potential of audit.
SOCIAL ACCOUNTABILITY AUDITS: CHALLENGING OR DEFENDING
DEMOCRATIC GOVERNANCE?
Dr
Sasha Courville Regulatory Institutions Network, ANU
With the rise of corporate social responsibility, a
dazzling array of initiatives to integrate social justice
issues into business practices have been established
ranging from self-regulatory approaches with company
self-declarations to sophisticated private regulatory
systems based on independent third party certification.
The latter category includes international initiatives
such as the Fair Trade Labelling Organisations International
(FLO) with its certification and labelling program allowing
consumers to identify fairly traded products such as
coffee, tea, cocoa, honey, sugar and bananas or Social
Accountability International’s accreditation system
for certification bodies evaluating facility-based compliance
to the SA 8000 standard, based on fundamental ILO conventions.
As a new area of auditing
practice addressing subjective issues at the global
level, auditors from existing programs, labour leaders,
worker rights activists and other specialists recognize
that social auditing is complex, vulnerable to bias
and often simply incomplete. However, given recent developments
in social auditing methodologies and the creation of
new organizational structures responsible for standard-setting
and certification processes, social auditing systems
have much to contribute to the wider debate about the
role of ‘audit’ as a tool of regulation and
accountability in today’s society. It is argued
in this paper that social auditing processes, if done
well and situated within a stakeholder-based institution,
can aid democratic processes.
This paper begins with
an overview of the landscape of social auditing within
the broader framework of corporate social responsibility.
Unique aspects considered are the voluntary and market-based
characteristics of social auditing systems. In order
to allow a detailed understanding of social auditing
in practice, the second section explores two examples
of social auditing and certification systems. This section
provides a brief overview of the organizational structures
of these initiatives followed by the standard-setting
procedures, how the systems address the issue of independence
as well as the steps involved in a given audit and the
tools used by auditors to evaluate compliance to the
standard. Finally, the decision-making processes regarding
certification are outlined, as are appeals mechanisms
in place. The third section of the paper examines social
auditing through the lens of trust, accountability,
and ownership of the process.
DEMOCRATIC AUDITING.
Professor
Marian Sawer, Political Science Program, Research School
of Social Sciences, ANU
Democratic audit is a
specific approach to democracy assessment. It does not
provide an aggregate assessment but rather enables institutional
strengths and weaknesses, threats and opportunities
to be identified. It was pioneered in the UK but has
since been tested in eight other countries under the
auspices of the International Institute of Democracy
and Electoral Assistance. The audit frame currently
includes over 80 indicators, deriving from basic democratic
principles and mediating values. The underlying principles
are popular control over public decision-making and
political equality. These principles have been expanded
by the Australian audit team to identify separately
the principles of civil liberties and human rights and
quality of debate (deliberative democracy). The separate
identification (rather than subsuming) of principles
is in recognition of the possible tensions between the
majoritarian and liberal elements of representative
democracy. Mediating values which guide the audit of
political institutions include inclusiveness of representation,
accountability, transparency, responsiveness, participation
and solidarity.
The audit team is an
independent body (including some 35 academics across
Australia) collecting quantitative and other data. For
example, data showing the increased dependence of major
political parties on corporate donations, issues concerning
the adequacy of disclosure provisions in Electoral Acts
and options for addressing issues of party financing.
Stakeholders such as political party representatives,
clerks of parliament, electoral commissioners, NGO and
media representatives are involved once draft audits
are prepared and participate in the workshops that characterise
the audits. One of the aims, apart from providing data
for longitudinal and comparative purposes is to promote
informed public debate on issues of electoral reform.
AIDS AUDIT – HIV AND HUMAN RIGHTS.
Dr
Helen Watchirs, Regulatory Institutions Network, ANU
Auditing general human
rights in the specific area of HIV/AIDS is important
because the virus thrives in vulnerable communities,
and in turn exacerbates human rights abuses by providing
new opportunities for unequal treatment. It is a new
model of human rights monitoring conducted as a tripartite
process with community, government and expert representatives.
The audit attempts to increase accountability and compliance
with the International Guidelines of HIV/AIDS and Human
Rights in the dimension of formal law. The tripartite
composition attempts to balance the views of both external
(community) and internal (government) members, mediated
by the independent human rights expert performing the
main evidence gathering (that is, research of legislation
and case-law) and analytical work. The methodology uses
ten qualitative indicators based on justiciable rights
in the Guidelines (for example anti-discrimination,
liberty, health and privacy) and assigns quantitative
scores grouped in four quadrants (substantial, significant,
partial or minimal).
The immediate object
is to highlight areas of best practice, as well as legislative
gaps. The evaluation is designed as an intervention
to raise rights consciousness, understanding and debate,
and to serve as an advocacy tool for law reform by testing
the extent of implementation of international norms
at national and local levels. A transparent process
involving stakeholders sends a message that human rights
are important and can influence opinions legitimizing
the norms being measured. In Australia this involves
auditing laws in each State and Territory, as well as
the Federal jurisdiction. The methodology was originally
called a “Rights Analysis Instrument”, but
governments were reluctant to participate in the process
- cooperation was forthcoming when it was renamed “audit”(using
the democratic audit as a precedent for achieving legal
reform in the UK) in order to more powerfully communicate
its object, as well as promote serious consideration
of its tangible results. Indicators have had a difficult
history in the human rights area because many of the
aspirational concepts are perceived as inherently unmeasurable.
The narrow focus on formal
law should lower expectations about what can be achieved
by the audit, but there are dangers of complacency where
jurisdictions achieve high scores. However, the audit
incorporates a very basic notation device where there
is a divergence between law and its enforcement, to
avoid over-reliance on the results and to flag areas
for an anticipated second stage audit of broader dimensions
capturing actual practices. It is possible that auditees
can manipulate results, but this may not be dysfunctional,
for example using the audit as drafting instructions
for reforming laws. Requiring legal expertise of participants
is an obvious limitation, but a capacity-building function
is recognised by also including policy representatives
from community and government sectors in the audit.
There is room for negotiation of both the terms of the
questions and results of the audit in the consultative
process. However, what is being tested in these laws
needs to be consistent across jurisdictions in order
to be reliable, valid and verifiable. A major source
of contention is the ambiguity of some laws that requires
interpretation (usually based on secondary sources),
but structured questions can make evaluation of latent
content more objective.
Because the immediate
goal of the audit is to stimulate domestic legislative
reform it is designed not to be a democratic dead end.
A broader anticipated use of the audit is to feed the
focused results into the under-resourced UN treaty monitoring
system in order to sharpen the dialogue between independent
experts, governments and NGOs. Providing comparative
data on whether formal laws comply with human rights
norms enables internal tracking over time to see whether
the situation has improved or deteriorated, and external
comparison with other jurisdictions. A longer term objective
of the audit is to link results with other quantitative
disciplines, such as epidemiology, in order to empirically
test the nature of the link between health and human
rights. A key challenge is the usefulness of the audit
in developing countries where the epidemic is concentrated
and there are pre-existing problems with the rule of
law and lack of resources for institutions administering
justice.
CORPORATE COMPLIANCE SYSTEM AUDIT.
Dr
Christine Parker, Senior Lecturer, Law Faculty, University
of Melbourne and
Research Associate, RegNet, ANU.
Many regulatory regimes
now require organizations to internalize responsibility
for their own ethics and regulation through compliance
programs via license conditions, requirements of enforceable
undertakings and other settlements of potential enforcement
action, and even corporate probation orders. The reliance
on compliance systems has high stakes. On the one hand
it promises a high level of corporate responsibility
performance through internalisation of responsibility
in every day management. On the other hand it delivers
to corporate management and professional advisers a
high level of control over the achievement of regulatory
objectives and puts regulators in a position where they
are virtually guaranteeing the adequacy of companies’
management systems to meet compliance objectives. Regulators
rarely have the resources to monitor more than a small
number of companies for their compliance processes.
In order to bridge the gap, some regulators require
third party audit in an attempt to receive assurance
that adequate compliance systems are in place.
This paper critically
examines the ability of compliance system audits to
provide adequate assurance of compliance system performance.
My empirical evidence comes from the use of compliance
system audit in monitoring compliance with enforceable
undertakings agreed between companies (that have allegedly
breached the law) and the Australian Competition and
Consumer Commission. I also use some evidence from the
Australian Securities and Investments Commission’s
use of compliance system audit for monitoring compliance
with enforceable undertakings and also under the managed
investments licensing regime. Data was collected by
interviews with regulators and auditors, and analysis
of enforceable undertakings and audit reports.
The evidence suggests
that the real value of compliance system audits in the
enforceable undertaking context is as a management review
not as verification that a company has put in place
a compliance program. It is the audit’s critical
and dialogic aspects that induces better compliance
- the fact that corporate management listens to and
engages with the auditor’s expert opinion on how
to improve compliance management. The regulatory assumption,
by contrast, is that auditors will provide ‘cold
comfort’ certificates - an attestation that the
audit has been able to verify that an adequate compliance
program is in place. Yet verification of adequacy of
a compliance system is illusory because it assumes the
ability to reliably measure compliance system performance.
Current compliance systems audits mostly evaluate design
and implementation of systems but rarely attempt to
measure outcomes and performance of those systems. Furthermore
verification implies a full stop in the compliance process
– it is an opinion that closes the consideration
of compliance management by stating its adequacy rather
than opening it up to review and further improvement
in the light of changing circumstances. Nevertheless
it may be the formal regulatory requirement of verification
(and the belief that it is possible) that gives the
compliance review its power in encouraging management
to listen and respond, and to improve compliance management.
The danger is that the
review aspect of the compliance system audit will be
captured by management ideologies and concerns. It will
be insufficiently epistemically independent of management.
In the enforceable undertaking audits, this is evident
in a tendency to focus on management systems at the
expense of forensic investigation of harm done (or at
risk of being done) to consumers, and in a failure to
seek out public opinion and input. This style of audit
undermines the basic regulatory objective of democratic
accountability for corporate responsibility. As Michael
Power argues, it is ‘not designed to support public
debate or to connect the audit process to wider representative
organs or to further machinery of regulatory escalation…
the audit process… is not a basis for rational
public deliberation. It is a dead end in the chain of
accountability’ (p127). I conclude by using the
literature on critical social audit to show that there
is, nonetheless, significant potential for compliance
system audit to open up corporate management to democracy,
and to make some suggestions as to how this might be
possible.
QUALITY IN THE MARKET FOR FINANCIAL REPORT AUDITS:
REGULATION OF AND COMPETITION FOR AUDITOR INDEPENDENCE.
Professor
Keith Houghton, Australian National Centre for Audit
and Assurance Research
The allegations of audit
failure are no longer rare. In several parts of the
developed world concerns of the quality of financial
report audits are routinely discussed in the media and
the wider community. The collapse of a Texas based energy
trading company - Enron – has arguably been a catalyst
for profound changes and proposed changes in auditing.
Many of these focus on the presence and extent of auditor
independence.
Financial reports are
merely the representations of company management. The
audits of financial reports add value by providing a
competent and independent attestation of the validity
of the representations made. There is significant evidence
that audit firms are active rivals in respect of audit
pricing and competency but there is little or no observable
evidence that audit firms compete in respect of independence.
Auditor independence
and the quality of financial report audits more generally
is rarely tested with great rigour other than in the
circumstance of corporate failure. When it is tested
some would argue that its alleged sub-optimality is
too common. Often auditors have good defenses as to
their competency but rarely do they have equally convincing
defenses for the objectivity of their decision-making
or the independence of their audit.
A major issue for the
regulation of auditor independence is that the threats
to independence are frequently subtle and difficult
to measure. Hence regulating the decisions that relate
to independence cannot rely on crude definitions and
imprecise regulatory measures. This paper argues that
firms that undertake financial report audits need to
be more transparent and competitive in respect of auditor
independence. A regulatory model that uses this premise
is proposed.
ENVIRONMENTAL AUDIT - CUI BONO?
Dr
Roger Burritt, School of Business and Information Management
The roles and benefits
of environmental audit are explored in this presentation.
What is environmental audit? Is it at the voluntary
end of the regulatory mix? How is it linked with environmental
management? Is verification important? To whom does
it matter? Is there an expectations gap? Are dialogue
and trust important? What are the links with maintaining
organizational legitimacy? The presentation comments
on these issues in the context of audit as a regulatory
tool.
AUDITING THE AUSTRALIAN PUBLIC SECTOR.
Colin
Scott, Law Program/Regnet ANU and Centre for Analysis
of Risk and Regulation, London School of Economics
There is considerable
evidence to support the hypothesis that Australian government
has undergone an ‘audit explosion’ in the
last 20 years. The traditional concern of public sector
audit with questions of legality, regularity and probity
remains. But supreme audit institutions (SAIs) have
taken on wider monitoring functions over public sector
bodies, resulting in both a quantitative and qualitative
expansion of their work. Additionally other regulators
of the public sector deploy audit methodology as part
of their regulatory toolkit. A key example is provided
by the intergovernmental Australian Universities Quality
Agency (AUQA).
The paper has three main
sections. The first examines the nature of the traditional
public sector audit function at both institutional and
normative dimensions. The second section takes as its
central theme the observation that audit has become
a solution to a much wider range of problems with the
public sector than the simple ones that public servants
may either run off with the money appropriated to their
unit, or devote it to purposes for which it was not
appropriated. As performance measurement has become
the central technique for promoting expenditure of funds
in an ‘efficient, economic and effective’
manner so auditors have become the key professionals.
Thus all supreme audit institutions in Australia have
a central role in assessing the value for money offered
by public sector bodies through the technology of performance
audit. Notwithstanding serious questions as to the capacity
of audit to answer questions about performance, the
appropriateness of performance audit represents orthodoxy.
The current battleground is over the extension of auditors’
responsibilities to cover non-financial performance.
Some Australian jurisdictions require SAIs to make such
assessments while others appear not to permit this practice.
The final section assesses
the contribution of modern audit techniques to oversight
of the public sector generally, assessing the division
of functions between departments, SAIs and other external
agencies. In this context the limited regulatory role
of audit becomes clear. There is little capacity either
to set standards or apply sanctions for breach. Audit
has a central role in cultural change associated with
New Public Management. On one ‘regulation of government’
analysis its contribution to regulatory oversight over
performance is best understood as part of a wider regime
structure, which involves other agencies and departments.
An alternative perspective sees audit as having the
potential to act in a metaregulatory fashion, stimulating,
reviewing and steering regulatory capacities innate
to public sector bodies. On this analysis the central
question is how much and what kind of normative force
does an audit regime require to work effectively with
the self-regulatory structures of auditees.
AUDITING PUBLIC SECTOR PERFORMANCE INFORMATION: THE
INTERNATIONAL EXPERIENCE.
Dr
Peter Wilkins, Director Policy, Office of the Auditor
General, Perth, WA
Public sector auditors
are increasingly being asked to provide assurance regarding
the quality of performance information reported by agencies
to Parliament. This relatively new type of audit has
strong similarities with the traditional auditing of
financial statements, but there are also some major
differences. There are also similarities with performance
or "value for money" auditing, with some of
these audits commenting on the quality of the information
as part of a wider scope.
In some cases, the audit
is restricted to commenting on the accuracy of the data
and associated calculations, whereas in others there
is a much wider assessment of the relevance and appropriateness
of the information. The form of the audit report also
varies from a traditional opinion to a more extensive
commentary and presentation of findings.
The reasons for requesting
this assurance include enhancing the use of the information
by establishing its credibility, and through the feedback
process enhancing the quality of the information itself.
These reasons and some underlying drivers need to be
viewed in the context of the continuing debate on the
role of performance measurement. Relatively little is
known about the usage and usefulness of the performance
information, and there is debate regarding the unintended
consequences on behaviour and performance.
The paper will explore
the role and contribution of this type of audit and
the similarities, differences and issues identified
above. Possible areas for future research will also
be discussed.
THE CONSUMER AND CLINICAL AUDIT - WHAT DO I NEED
TO KNOW?
Fiona Tito,
Principal Health Policy Advisor, Australian Council
of Social Services
Currently in Australia,
it is very difficult for consumers to know whether the
practitioner that are using has experience or is skilled
in a particular procedure, or whether the facility in
which the person practices has checked these things.
Some of this lack of knowledge relates to the information
not being publicly available. But in most cases, it
arises because it is not being systematically collected
by individual doctors or facilities.
There is a wide range
of activities in Australian health care, which are moving
towards collecting this information for different reasons.
They are using a range of methodologies, including incident
monitoring, root cause analysis and clinical audit.
This work will be summarized and the likely outcomes
of these reforms, so far as better informing consumers
is concerned.
Moves to increased clinical
audit, at least in the case of the most serious adverse
events, may provide some information, but much of it
is not going to identify the doctor. There are also
needs to address performance feedback loops, so that
clinicians can improve and build these into the credentialing
processes.
The challenge for all
of this is how to give consumers relevant useful information,
which can help in their health care decision-making.
At a systemic level the challenge is how to create a
learning ‘no blame’ environment, while still
actively ensuring that there is systemic responsibility
for addressing chronically poor performers and the very
small number of ‘bad apples’.
