PART I
TRANSPARENCY: WHEN THE AUDITOR IS THE SOCIETY
1 | | 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 sphereâand its role in what has come to be called New Public Management, or NPMâhas become the subject of intense debate.1 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 âAudit Explosion.â Next there is a discussion of the impact of audit practices in shaping the development of the âAudit Society,â 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.2 His initial reflections were based on policy developments in the United Kingdom in the 1980s.3 Subsequently, he examined the variable diffusion of NPM ideas internationally.4 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:
âUnbundling of the public sector into corporatized units organized by product
âMore contract-based competitive provision, with internal markets and term contracts
âStress on private sector management styles
âMore stress on discipline and frugality in resource use
âVisible hands-on top management
âExplicit formal measurable standards and measurement of performance and success
âGreater 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 thatâHood reflected on what was happening in the United Kingdom in the 1980s and early â90s 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.5 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: âfinancialâŚVFMâŚenvironmentalâŚmanagementâŚforensicâŚdataâŚintellectual propertyâŚmedicalâŚteachingâŚtechnology. More recent examples include suggestions of âgender auditâŚreligious audit.â6 Power was criticized on the grounds that many of these examples of the Audit Explosion were inspections, not audit.7 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 âaudit thinkingâ permeates inspection activities.8 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.9 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 âLight Touchâ 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.10 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.11
The Audit Society
In 1997 Power articulated the thesis that we now live in an Audit Society.12 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 âauditâ brings up images, especially public images, of control. A consequence of this is a spread of âaudit talkâ 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 âvery particularâ concept of accountability. This concept of accountability is based on a closed-loop, cybernetic concept of how organizations functionâit 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.13 In particular, the audit process_remains invisible to the wider public, commentators, and policymakers. Audit is only public when it âfails.â 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.14 Regarding the relationship of audits to legitimacy, the context of the Audit Society suggests that audits offer âcomfort or organizational legitimacyâ to the management of organizations. This may result in audit becoming a ârationalized ritual,â as audit concerns itself with auditable form rather than substance. This has the distinct impact of creating a compliance, or âtick box,â mentality, which is explored further in a later section. Power also suggested that a classic feature of legitimacy theoryâthe decoupling of audit from core activitiesâmight emerge as an aspect of the Audit Society. The second strand of the Audit Societyâcolonization and culture changeâmay 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 âcomplianceâ 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 Societyâdisplacementâis one of the dysfunctional impacts of audit. Displacement is the primacy of audit compliance over operational needs and tasks. It is one of the âside effectsâ 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 manifestationsâinformation 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 âaudit works,â even if it does not. Fundamentally, âauditableâ performance becomes an end in itselfâthat 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 lifeâin particular, the compliance mentality. A number of cases of this âtick boxâ compliance mentality were identified in the 2007 Police Confederation Annual Conference in Blackpool, England:
âCase 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 ÂŁ700 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 inquiriesâcommunity police officers thus investigated 542 crimes. Five hundred is better than one.
âCase 2. A Cheshire man was cautioned by police for being âfound in possession of an egg with intent to throw.â
âCase 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.15
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 âvalue for money.â 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 âcan doâ philosophyâany problems of practice can be overcome. Proponents also present VFM as a market opportunity for accountants and auditors. There is some evidence of profes...