Reforming the Public Sector

How to Achieve Better Transparency, Service, and Leadership

BROOKINGS INSTITUTION PRESS

Copyright © 2012 THE BROOKINGS INSTITUTION and SCUOLA SUPERIORE DELLA PUBBLICA AMMINISTRAZIONE (SSPA)
All right reserved.
ISBN: 978-0-8157-2288-5

Contents

9 Public Sector Performance: Managing Governments by the Numbers Geert Bouckaert……………………………………………………………………………………………………………………………………………………………………..10

Chapter One

IRVINE LAPSLEY

Shedding Light or Obfuscating? Audit in an NPM World

This chapter examines the significance of audit in contemporary society. The role of audit within the public sphere—and its role in what has come to be called New Public Management, or NPM—has become the subject of intense debate. Specifically, this discussion focuses on the extent to which audit practices and audit work have become a dominant reference point in everyday lives of citizens as they go about their business, whether in a personal capacity or in the course of fulfilling workplace commitments. In this discussion the phenomenon of audit practice is scrutinized from the perspective of whether the tools and techniques of audit actually enhance or inhibit, or even negate, transparency in public finances and public administration.

This chapter has six sections. First there is an exploration of what NPM means and the role of audit and accounting within this phenomenon. Second, audit practices are examined from the perspective of the “Audit Explosion.” Next there is a discussion of the impact of audit practices in shaping the development of the “Audit Society,” a concept that builds on the idea of the Audit Explosion. The fourth section presents an examination of the practices and technologies of auditors, who operate within the sphere of public services. Fifth, there is a discussion of what transpires when the Audit Society meets the Risk Society. This section examines whether audit technologies and the context in which they are deployed actually aid transparency in public finances and public administration. Finally, I set forth my conclusions on the implications of the preceding discussions.

An NPM World

The idea of the NPM world was first advanced by Christopher Hood. His initial reflections were based on policy developments in the United Kingdom in the 1980s. Subsequently, he examined the variable diffusion of NPM ideas internationally. These ideas advanced by Hood have proved to be immensely significant in understanding, studying, reflecting on, and analyzing public sector reforms. There is now an immense literature on the NPM phenomenon. The attributes identified by Hood remain hallmarks by which analysts can study the public sector. The key NPM components, according to Hood, are the following:

—Unbundling of the public sector into corporatized units organized by product

—More contract-based competitive provision, with internal markets and term contracts

—Stress on private sector management styles

—More stress on discipline and frugality in resource use

—Visible hands-on top management

—Explicit formal measurable standards and measurement of performance and success

—Greater emphasis on output controls

All of these dimensions of NPM enhance the significance of both accounting and auditing practices, particularly private sector practices in the oversight of public services. It is important to note that Hood’s observations were exactly that—Hood reflected on what was happening in the United Kingdom in the 1980s and early ’90s and that was the basis of his coining of the term NPM. This is not to be confused with advocacy of any or all of these reforms by Hood. However, the significance of NPM as a government policy, internationally, is beyond challenge. Regarding this particular study, one of the key authors in the field of audit located his concepts of Audit Explosion and Audit Society specifically within the sphere of the NPM. These ideas are discussed next.

The Audit Explosion

In 1994 Michael Power observed that there was an Audit Explosion in the United Kingdom. He justified this observation by detailing the diffusion of audit: “financial … VFM … environmental … management … forensic … data … intellectual property … medical … teaching … technology. More recent examples include suggestions of “gender audit … religious audit.” Power was criticized on the grounds that many of these examples of the Audit Explosion were inspections, not audit. However, inspections of, for example, schools or social work now fall within the sphere of influence of regulatory audit bodies. Power highlights the manner in which “audit thinking” permeates inspection activities. No one has challenged the basic assumption that the quantum of audit and inspections in public life has grown significantly in recent years.

Indeed, the volume and scale of audit activity continue to increase. For example, Irvine Lapsley identifies a number of recent examples from the United Kingdom’s National Health Service. The National Health Service has heavy inspection and audit with at least fifty-six bodies having the right to visit NHS hospitals and trusts. The sheer number of inspections standards, and the volume of information required to demonstrate compliance, makes it difficult to extract value from these processes and use them to improve patient services.

Indeed, the Health Commission’s “Light Touch” annual health check has an overwhelming impact. It requires five hundred separate information topics to be addressed in a questionnaire so voluminous that managers doubted they could complete it. There is overlap with other audits and inspections. Lapsley cites the views of the NHS Confederation in 2007 in support of this. Much of this Audit Explosion has had little to do with efficiency, and there is skepticism regarding the claims of value added that financial auditors promote.

The Audit Society

In 1997 Power articulated the thesis that we now live in an Audit Society. This builds and extends on the idea of the Audit Explosion. Power depicts a society in which audit practices dominate much of everyday life. Power identified a number of manifestations of the Audit Explosion that enhance the influence of audit on society. One feature of this was the use of formal audit documents outside their original context. An example of this would be a risk assessment of specific internal controls that is portrayed as a generic weakness at management meetings, especially at meetings of managers at some remove from the scene of the risk assessment. A further dimension of this is the manner in which the term “audit” brings up images, especially public images, of control. A consequence of this is a spread of “audit talk” in governance. One fundamental implication of this pervasive influence, according to Power, is that audit can shape the activities it controls. This outcome is affected by the nature of audit, which presents a “very particular” concept of accountability. This concept of accountability is based on a closed-loop, cybernetic concept of how organizations function—it is an instrumental view of organizational life, in which cause and effect can be determined with precision. However, Power argued that the spread of audit does not necessarily make matters of public finances or public administration more transparent and can actually obscure activities going on in organizations. In particular, the audit process_remains invisible to the wider public, commentators, and policymakers. Audit is only public when it “fails.” A truly spectacular example of such public failure is the case of Enron and its aftermath.

The Audit Society thesis has been interpreted as having three strands: (1) legitimation and decoupling strategies, (2) colonization and culture change, and (3) displacement of core organizational activities. Regarding the relationship of audits to legitimacy, the context of the Audit Society suggests that audits offer “comfort or organizational legitimacy” to the management of organizations. This may result in audit becoming a “rationalized ritual,” as audit concerns itself with auditable form rather than substance. This has the distinct impact of creating a compliance, or “tick box,” mentality, which is explored further in a later section. Power also suggested that a classic feature of legitimacy theory—the decoupling of audit from core activities—might emerge as an aspect of the Audit Society. The second strand of the Audit Society—colonization and culture change—may lead to challenges to the organizational power of professional groups. Within this dimension, the technology of VFM (value for the money) audit may become a vehicle for organizational change. The act of “compliance” with audit requirements may also result in the implanting of the values underlying the audit approach within organizations and society at large. In this sense, audit activity becomes a dominant reference point in everyday life, and the values of individual members of society and employees of organizations and their practices may change. However, although Power articulated the concept of colonization as a feature of the Audit Society, he also expressed the view that outright colonization is rarely successful. The third dimension of the Audit Society—displacement—is one of the dysfunctional impacts of audit. Displacement is the primacy of audit compliance over operational needs and tasks. It is one of the “side effects” that may undermine the performance of organizations. Through displacement, the impact of the Audit Society is profound. The fulfillment of audit needs and processes may reduce the time available for core organizational activities. This phenomenon can take on a number of manifestations—information overload, for example. This reliance on audit may reveal a decline in organizational trust. Power suggests that in presentations on audit that are given within organizations the view may be expressed that “audit works,” even if it does not. Fundamentally, “auditable” performance becomes an end in itself—that is, performance that can be counted, what can be checked, with evidence of an audit trail more important than service outcomes. A triumph of bureaucracy over service needs.

The study and investigation of such a wide-ranging phenomenon as the Audit Society presents difficulties because of its sheer scale. However, examples of aspects of the Audit Society are evident in everyday life—in particular, the compliance mentality. A number of cases of this “tick box” compliance mentality were identified in the 2007 Police Confederation Annual Conference in Blackpool, England:

—Case 1. Police spent weeks doing door-to-door investigations to turn a single theft into 542 different cases to meet crime-fighting targets. The operation began after a child was accused of keeping £700 raised for Comic Relief through sponsorship. To beef up their number of targets, police officers were sent to talk to every person who had sponsored the child. They spent two weeks on door-to-door inquiries—community police officers thus investigated 542 crimes. Five hundred is better than one.

—Case 2. A Cheshire man was cautioned by police for being “found in possession of an egg with intent to throw.”

—Case 3. A child in Kent who removed a slice of cucumber from a tuna mayonnaise sandwich and threw it at another youngster was arrested because the other child’s parents claimed that it was an assault.

All of these cases demonstrate the manner in which a compliance culture as part of the Audit Society may lead to perverse, absurd, illogical outcomes in public administration.

This discussion continues with a close scrutiny of the technologies deployed by auditors and an examination of these technologies’ capacity to aid transparency in public affairs.

Audit Technologies: Illumination or Obfuscation?

The tool most frequently used by public sector auditors is VFM, or “value for money.” The core idea of VFM is an expansion of the audit function from accounting and compliance to assessments of the efficacy of public expenditures. The VFM approach is concerned with the identification of economies and efficiencies in the provision of services, but also with the overall effectiveness of programs of expenditure. Within the United Kingdom this tool has developed into the Best Value audit. Where VFM is an approach that can be used for specific audit investigations, Best Value is a more holistic approach to public sector audit in which complete organizations are audited.

VFM Audit

Proponents of VFM audit exhibit a “can do” philosophy—any problems of practice can be overcome. Proponents also present VFM as a market opportunity for accountants and auditors. There is some evidence of professional firms “projecting” themselves as experts in this area. The overall thrust of professional institute publications is of a “received wisdom”—all is clear, self-evident. However, there are fundamental reservations over what VFM means, an issue that is glossed over by practitioners. In particular, the issue of quality of service is a major problem in VFM studies. Also, there are uncertainties over how auditors detect and demonstrate efficiency in a public sector context. Indeed, the level of skills required to undertake high-level VFM studies may be beyond the core competencies of professional auditors. Also, the public services are replete with services and organizations in which professional groups have a voice and influence. These powerful professional groups may be an impediment to VFM studies.

There is not a significant volume of evidence of VFM audit in practice. Given the sensitive nature of the subjects that may be subject to VFM audit, this scarcity of evidence should not be surprising. However, in a novel study Lapsley and C. K. M. Pong investigated the experiences of an expert group of VFM auditors. Surprisingly, the study by Lapsley and Pong found that members of public sector organizations—from all professions—were generally positive about VFM, although initially they had been hostile. Within this group of professionals, the finance staff were most positive about VFM, which might be expected. However, the overall focus of VFM audits tended to be on operational rather than strategic benefits. Furthermore, the conduct of VFM audits presented major challenges for these VFM auditors. The view was expressed by them that they were not dealing with “text book situations.” These VFM auditors experienced particular difficulties resulting from the ambiguity of what constituted “quality.” They expressed concerns about the lack of robust measures of key variables that they wished to investigate. They also expressed reservations over the quality of evidence that they could gather. For example, one acute issue was the interdependence of service provision. VFM auditors found it difficult to disentangle the interactions of different services in their evaluations of a specific service. In short, the easy VFM audits have been done. These findings suggest that the apparently self-evident outcome of transparency from VFM audits is misleading, given the operational difficulties of VFM and its potential for ambiguity in interpretation and implementation.

Best Value Audit

This form of audit was introduced as government policy in the United Kingdom in 1997. The policy of the previous Conservative administrations of introducing Compulsory Competitive Tendering (outsourcing) for a range of public services had been criticized as being overly focused on cost saving, with little attention paid to the quality of services offered. In 1997 the incoming Labour government proposed Best Value audit as an alternative to Compulsory Competitive Tendering. It did this by placing the entire process within the domain of government auditors. Thus the very act of introducing Best Value audit can be seen as an addition to the Audit Explosion. The aim of this new tool was to obtain Best Value by securing economic, efficient, and effective services. Actually, the “three E’s” of economy, efficiency and effectiveness are fundamental tenets of VFM as well. The difference between VFM and Best Value was that the latter approach was even more comprehensive, with auditors delivering verdicts on whether entire organizations were fit for purpose. The aim was to devise a general framework with considerable local discretion on resource use. The reality was a system that privileged audit as a function, which contributed to the Audit Explosion and also contributed to the expansion of the Audit Society.

In the implementation of Best Value, the definition of this new tool resonates with the ideas of the Audit Society. Specifically, one government policy statement described Best Value as “a process rather than a product … a process of change and progress…. It promotes changes in attitude, culture and management style within councils” (emphasis added). Best Value audit requires constant reflection on the measurement of successes and on shortcomings found and actions taken to improve.

(Continues…)

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