An Examination of Government Internal Audits' Role in Improving Financial Performance

By Aikins, Stephen Kwamena | Public Finance and Management, October 1, 2011 | Go to article overview

An Examination of Government Internal Audits' Role in Improving Financial Performance


Aikins, Stephen Kwamena, Public Finance and Management


ABSTRACT

This research empirically examines how the work of government internal audits lead to improvements in government financial performance. Periodic economic downturn and dwindling state aid to local governments have left many public managers looking for ways to improve financial oversight and operational efficiency. Although internal audit is one area with the expertise to assess efficient utilization of financial resources and help improve oversight and financial performance, public administration research has paid little attention to the role of internal audit in the financial management process. A survey was sent to local government Chief Auditors to learn of audit's examination of government operations and financial management. Financial performance data were obtained from the Comprehensive Annual Financial Reports (CAFRs) of survey respondents' local governments and analyzed with the survey responses. Results show that in general, local government auditors perform more audits in operational areas that deal with fiscal receipts and outlays. Additionally, auditors' work significantly influences local government financial performance both directly and indirectly through improvements in internal controls and efficiency of operations.

Key Words: internal audit, financial management, financial performance, control adequacy, control effectiveness, documented policies, procedural guidelines, government

1. INTRODUCTION

The financial challenges facing state and local governments across the United States in recent years have resulted in the inability of resources to keep up with citizens' increasing need for government services. The property tax accounted for 58.5% of tax revenue and 36.8% of own source revenue of all American municipal governments (including townships) in 1992. These prop-erty tax shares had fallen to 53.3 and 33.6%, respectively by 2007 (U.S. Cen-sus Bureau 2009). In a recent study of city government chief finance officers conducted by the National League of Cities (NLC), nearly 90% of respondents reported their cities are "less able to meet fiscal needs in 2010 than in previous year", and 61% reported decreased state aid to cities as a leading factor affect-ing their budgets (Hoene & Pagano 2010). According to the NLC survey re-sults, city sales taxes declined in 2009 over previous year receipts by 6.6% in constant dollars, and city finance officers projected further decline in 2010 by 4.9%. When asked about the most common responses to prospective shortfalls in the 2010 fiscal year, by a wider margin the most common responses were instituting some kind of personnel related cut (79%) and delaying or cancel-ling capital infrastructure (69%). Two in five (44%) said their city is making cuts in services other than public safety and human-social services that are in higher demand during economic downturn.

The above stated situation has leftmany public administrators looking for ways to improve financial oversight and operational efficiency within prevail-ing budgetary constraints while providing reasonable levels of services to their constituents. For this to happen, concrete measures should be put in place to improve financial efficiency and performance. The internal audit function is the key governmental unit with the expertise for assessing the effectiveness of utilizing financial resources by identifying waste, inefficiencies and fraud in budget items like the ones that the above referenced NLC survey respondents like to cut or retain, and for making recommendations to enhance efficiency of operations and improve financial performance. For this reason, understanding audit's role in the financial management process is essential.

The inability of resources to keep up with citizens' increasing demand for services can produce an expectation gap between what citizens expect and what they receive from their government, and increase pressure on public offi-cials to demonstrate a higher level of operational accountability over public funds (Montondon 1995). …

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