Are National Audit Office “Value for Money” Audits Themselves Value for Money?
The National Audit Office (NAO) is responsible for the financial and “value for money” audits of central government expenditure, as well as other publicly related bodies.
Although there is no single definition for what a value for money audit is, the most widely accepted definitions connect value for money audits with the review of the three E’s (Lecture 2, AC340 Lent Term, Liisa Kurunmakii): •Economy – providing the intended service at the lowest cost possible, with regards to maintaining the quality of service •Efficiency – gaining the maximum output from a given level of inputs •Effectiveness – the extent to which these public bodies achieve their policy objectives
With this in mind, it is clear that in order for a “value for money” audit (henceforth denoted as VFM audit) to provide value for money it must also adhere to these three E’s; a VFM audit must be minimal in terms of cost, it must be effective in terms of finding areas for improvement, and it must make the most of resources used. The VFM audit’s benefits must outweigh its costs. Throughout this essay I will explore and demonstrate with examples the conditions under which VFM audits do provide value for money, as well as when they don’t.
Ultimately a VFM audit is only value for money to the extent that it leads to improvements in the way the audited bodies can improve their processes, with regards to the three E’s. Without this, the VFM audit is an unnecessary and costly extension of the financial audit. However, if the VFM audit itself is in possession of the three E’s, then it should provide value for money.
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In 2011, the NAO’s recommendations generated savings of ? 1. 1 billion off the back of an outlay of ? 67. 8 million (NAO Annual Report 2012).
From this, it is easy to see that the NAO’s work overall yields significant benefits over costs. A 1997 paper by Summa and Pollit also shows that 95 per cent of the NAO’s recommendations were taken on board by the Public Accounts Committee (PAC) in 1994, suggesting that the organisations efforts and resources aren’t wasted. This paper also shows how the savings from recommendations coming directly from VFM audits had grown between 1992 and 1994, suggesting their growing importance.
The NAO also consistently look to minimise costs and maximise efficiency, as shown in the NAO’s 2012 Annual Report. Therefore, in a very simple cost-benefit analysis, the VFM audit does seem to provide value for money. With deeper analysis, however, there are instances where such audits could lead to sub-optimal results in some situations. The bodies subjected to VFM audits primarily have social goals.
For example, the NHS’ priority is to treat the unwell, while financial concerns are secondary. The mere presence of VFM audits, which despite having many non-financial aspects are ultimately financial in nature, can lead to a focus on achieving cost efficiency as an end in itself, above any social goals. This is what Power refers to as a ‘colonising’ effect of auditing; the presence of the audit leads to the auditee focusing on the audited measure, in this case value for money.
This was the case in the recent Mid Staffordshire Trust scandal; in order to achieve Foundation Trust status, the management at this hospital cut costs by removing beds, failing to invest in medical equipment and staff, and neglecting their medical duties in order to meet targets (for example, one measure on which they were judged were patient waiting times in A&E; this led to dysfunctional behaviour, as there were cases when minor injuries were treated above major illnesses in order to meet the four hour waiting time).
These cuts, along with other failures, resulted in hundreds of unnecessary deaths. And yet, the hospital hit its target saving of ? 10 million; financially, it was a success, but medically a massive failure. While it was not directly the fault of a VFM audit, this case shows how the use of financial/economic measures for evaluating the efficiency of an organisation can lead to unintended dysfunctional outcomes.
As part of the ‘New Public Management’ idea of introducing market concepts into public organisations, it could be argued that VFM audits, by explicitly mentioning ‘money’, could contribute to such failings by being rooted in the financial; a better term for VFM audits could be “performance audits”, as less emphasis is placed on financial terminology, perhaps giving the NAO scope for a more rounded audit. With this in mind, it can be argued that one of the VFM audit’s strengths is that it does take into account the effectiveness of the auditee in reaching their social objectives (as shown by the three E’s).
The inherent difficulty for any public body is to balance effectiveness with efficiency and economy; the NAO must therefore take this into account when carrying out VFM audits, in order for the audits themselves to be of value. Auditing the effectiveness of a public organisation is a difficult task in itself, however. What does effectiveness entail, and how does one measure it? You could argue that the effectiveness of the police force could be measured by looking at the ratio of number of crimes reported to the number of crimes solved.
This seems to be in line with the police force’s social goals, so in theory seems an appropriate proxy for effectiveness. Yet it is also easy to see how this metric could be manipulated; where it is unlikely that a crime will be solved, the reporting of the crime may be ignored. The measure will give a false image of the efficacy of the police force in question, when in reality they have been far from effective. This is what Power refers to as ‘de-coupling’, where the auditee is compliant with the recording of the measure, but does not behave in a manner consistent with the intended goal of the measure.
The problem here comes with making things auditable. When measuring non-financial items such as effectiveness, one must use imperfect proxies (as you cannot simply take a yard stick and measure ‘effectiveness’). If we are unable to find suitable proxies, we are not fully able to audit the effectiveness of an organisation. This then compromises the usefulness, and hence value, of a VFM audit. The above problems display the inherent problems of VFM audits; by being rooted in the financial, they can lead to public organisations de-prioritising their social obligations and objectives in order to enhance efficiency and economy.
By auditing what is arguably inauditable, VFM audits can create surface compliance, where the letter but not the spirit of what is being measured is followed. Both of these are risks that need to be considered by the NAO, as they both seek to undermine the value of VFM audits. But ultimately, VFM audits prove their worth when they result in efficiency improvements in public organisations. This can be assessed tangibly, shown by the savings of ? 1. 1 billion from a net outlay of ? 67. 8 million. We can also clearly see the implementation of efficiency improvements in public sector bodies.
It can also be argued that even the presence of VFM audits help to promote the three E’s in public sector companies (they know that they could be assessed in such a way, and will not want to appear to be excessively inefficient), although it is much more difficult to assess whether NAO audits provide value for money in this context as it is hard to know to what extent the audit presence made a difference. But overall, I believe that the evidence above shows that for the majority of situations VFM audits do indeed provide value for money.