What is a Performance Audit?

On April 1^st, I attended a training session in Ocean Shores, Washington, sponsored by the Washington State Chapter of the American Public Works Association (APWA) and the Municipal Research and Services Center (MRSC) on issues related to performance audits. In November 2005, the voters of the State of Washington approved Initiative 900 that directed the Washington State Auditor's Office to conduct performance audits of state and local government agencies in the state. The initiative became effective on December 8, 2005. The State Auditor's Office has already conducted a couple of fairly high profile audits, most recently the highly critical audit of the Port of Seattle’s construction management and contracting practices that made front page headlines when it was release in late December 2007. There have also been performance audits on the construction management programs of Sound Transit and the Washington State Department of Transportation (WSDOT). The State Auditor’s Office will continue selecting various public agencies and programs to audit.

Speakers at the training session included a representative from the State Auditor’s Office, a principal from one of the consulting firms hired by the State Auditor’s Office to conduct the Sound Transit and WSDOT audits, and a representative from WSDOT.

Unlike an annual financial and compliance audit, a performance audit looks at issues of economy, efficiency, and effectiveness of the policies, management, fiscal affairs, and operations of state and local governments, agencies, programs and accounts. A performance audit seeks to identify areas of performance that could be improved in order to meet best practice and other criteria standards.

For each performance audit, the State Auditor’s Office identifies objectives for the audit, working in consultation with the agency. For construction management and contracting programs, the State Auditor’s Office is continuing to refine and develop the criteria that currently include the following, but that are adapted for each specific audit:

1. Over the most recent three-year period ending June 30, 2008, has the entity been effective, efficient and economical at planning, designing and managing the construction projects and construction contracts in order to:

1. Minimize all costs associated with its construction projects, including but not limited to engineering, land acquisition, environmental review, environmental mitigation, permitting and construction?
2. Minimize unnecessary change orders and delays that result in extra costs?
3. Keep projects on schedule?
4. Minimize risk by identifying it, eliminating it, minimizing it or sharing it with the contractor through good contract terms and contractor management?
5. Obtain the best quality, timeliness, workmanship and other value?
6. Minimize building maintenance and utility costs through cost-effective floor and building designs (decreases in future maintenance and utility costs should exceed the additional construction costs necessary to achieve them)?

2. How effective was the entity at soliciting, procuring and managing its Engineering, Consulting and Construction Management Contracts related to construction projects in order to minimize costs and maximize the value and quality of services provided?

3. How effective has the entity been at complying with the State’s and its own bidding and procurement requirements?

In preparing for a performance audit, an agency should identify those issues that may become the subject of the audit, evaluate the risks associated with the current practices, identify how the agency currently measures performance, etc. It may be useful for an agency to conduct a pre-audit of its own practices, either with in-house personnel or by hiring an outside consultant to conduct the audit. A pre-audit can help an agency identify areas that need improvement prior to a formal performance audit.

Once an agency has been selected for a performance audit, it’s a good idea for the agency to develop a communications plan for how they will interact with the auditor, elected officials, the public, etc. In addition, the agency should identify resources to help manage the interactions with the auditor.

If you’re interested in more information about performance audits, I would be glad to strategize with you about other key issues to be aware of and to share other information gleaned from the training. The State Auditor’s Office website has a special section with more information about performance audits, including a copy of the audits that have been completed thus far.