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​​Focus on the Three E's

Embedding value-for-money auditing in work processes can ensure economy, effectiveness, and efficiency are achieved.

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​Although developed in and long associated with the public sector, the concept of value-for-money (VFM) auditing is finding increasing interest and application in the private sector. These organizations realize the true power and range of value VFM audits generate. Understanding this approach can help position internal auditors to exceed stakeholders’ expectations. For example, VFM audits can enable resources to be acquired at optimal cost without jeopardizing quality and performance, unearth inefficiencies, and identify ineffective operations. Along the way, it also can help identify irregularities or potential indicators of fraud — all culminating in business improvements.

VFM auditing is embodied in Standard 2100: Nature of Work, which states, “The internal audit activity must evaluate and contribute to the improvement of the organization’s governance, risk management, and control processes using a systematic, disciplined, and risk-based approach. Internal audit credibility and value are enhanced when auditors are proactive and their evaluations offer new insights and consider future impact.”

Conforming to this standard requires a thorough understanding of the risks, governance structures, and control activities associated with improving business operations. This leads to assessing the acquisition of resources, evaluating business functions, and maximizing the achievement of goals — the very foundation of VFM audits. This foundation focuses on the three E’s: economy, efficiency, and effectiveness.

The VFM auditor asks: Are the right operations being performed to achieve the objectives of the unit (effectiveness) in the right way (efficiency) at an appropriate cost (economical use of resources or economy)? Answering such questions involves assessing an appropriate range of performance measurement criteria. For instance, if procurement is not acquiring goods and services at the right prices in the right amount and on schedule, then it is not effective because it is not achieving its goals. VFM audits can be applied to any business function such as finance, procurement, human resources, and marketing, as well as to any industry.

When performing a VFM audit, the auditor must possess a multitude of skills; be multidisciplined; let go of the financial statement audit mindset; be able to think outside of the box; ask challenging questions; be persistent and question the validity of information; and be able to work as a team player with subject matter experts, accountants, IT specialists, and management.

The Foundation

Economy alludes to the cost of resources (i.e., minimizing the cost of resources used for an activity without compromising quality). For example, if components “A” and “B” can equally be used and cost $20 and $30 each, respectively, to make product “C,” then purchasing the cheaper component “A” is the better option. Also, when copying a report for distribution, is the business unit using an expensive copying paper (70 cents/sheet) versus a cheaper (3 cents/sheet) paper to produce the same report? This review also could expose fraud if it is revealed there is collusion between the paper supplier and an employee to use more expensive paper. Do you send a report by mail, which incurs postage or courier costs, when it can be emailed at no cost? Other factors to consider when reviewing economy are determining that sound business practices are carried out, an optimal staff level is in place, excess resources are not on hand, and cheaper equipment is used where required.

Efficiency pertains to the methods of operations and include identifying slack, waste, redundancy, and duplication of effort; determining inappropriate use of operating procedures; identifying inefficient systems and procedures; and ensuring maximum outputs from inputs. The types of questions to ask during this aspect are:

  • Is activity “A” necessary?
  • Can two machines be used instead of one?
  • Can activity “B” be completed in five minutes instead of 10?
  • Is activity “C” a duplicate of activity “A”?
  • Department “A” produces 120 widgets against a plan of 100 indicating 120 percent efficiency, but department “B’s” efficiency is 80 percent — producing 80 against a target of 100. Is this because of staff training issues or something else?

Effectiveness measures the extent to which the objectives of an activity are achieved. It asks questions such as:

  • Are the right operations being performed?
  • Are objectives achieved?
  • Are these achieved objectives having a positive impact?
  • What factors exist to inhibit the satisfactory performance of a unit in achieving its objectives?

VFM audits add value to an organization in each of its three phases. Identifying and costing inefficient activities such as waste and duplication of effort, and validating that desired goals were achieved at minimal cost and with maximum efficiency, can have a dramatic and long-lasting impact on an organization.

Key Benefits

Understanding and carrying out a VFM audit can provide tremendous benefits to stakeholders in an organization by unearthing audit findings to aid management to discharge its mandate and allocate resources optimally. Within this context, a VFM audit:

  • Focuses on organizational and management performance.
  • Facilitates and promotes improved strategic and operational decision-making.
  • Assists management by identifying and promoting better management practices.
  • Clarifies management responsibility and leads to better accountability.
  • Enhances efficiency in the acquisition of resources.
  • Allows assessments over the achievement of objectives.
  • Identifies performance gaps by comparing input resources and expected outcome as well as the actual outcome.

Ultimately, VFM audit findings must stand on their own to add value to the organization.

A Powerful Tool

In any organization, there is an emphasis on getting maximum output from resources expended. An evaluation of all business functions is needed to ensure minimum- and lowest-cost resources are used without compromising the quality of output, inefficient activities are identified and eliminated, maximum outputs are obtained from minimal inputs, and objectives are realized to collectively achieve the greatest returns. VFM audits can be used to accomplish these tasks, unleashing significant benefits to the organization’s governance, risk management, and control environments. VFM auditors should be an integral part of the audit effort, as reflected in The IIA’s Core Principles for the Professional Practice of Internal Auditing’s emphasis on promoting organizational improvement.

Lal Balkaran
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About the Author



Lal BalkaranLal Balkaran<p>​Lal Balkaran, CIA, FCGA, FCMA, CGMA, is past president of IIA-Toronto and a widely published internal auditor and independent consultant with more than 25 years' experience.</p>


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