Performance auditing is the review of a program or process, and the systems supporting it, to determine whether it is achieving the primary goals of efficiency, effectiveness, and economy in its use of available resources. These reviews are often done in government and non-profit entities, but they are equally important in the for-profit sector. The goal is to determine if the organization is thriving. The three primary focus areas can be referred to as the Primary Es.

  1. Economy: This refers to the cost incurred while obtaining the inputs the organization, program or process needs to perform its activities. Economy is important because overpaying and waste, in any of its manifestations, is against the interests of the organization’s stakeholders. Overpaying can occur when buying inventory, fixed assets, office supplies when borrowing funds or paying for electricity, water, transportation, and waste disposal. Overpaying reduces the organization’s profitability and lowers the number of resources available for other needs. While profitability is often used as a metric in for-profit organizations, non-profits must follow the same principles and remember that they cannot operate with a deficit for long so the concept is still applicable. When assessing economy, it helps to ask:

    1. Is the organization paying a fair price for the inputs obtained?
    2. Is the organization getting the best value (not just the lowest price)? 

  2. Efficiency: This relates to the relationship between production (or outputs) and costs (or inputs). Efficiency can be measured in terms of money, time or energy. Everyone working within, or on behalf of, an organization has a responsibility to maximize the value and use of available resources.  Like the lack of economy, inefficiency reduces the organization’s profitability as it consumes more resources than necessary. 

  3. Effectiveness: It refers to the degree to which a program or process is successful in achieving its goals and objectives. An inability to achieve relevant goals and objectives puts into question the follow-through on the responsibility of the organization as an agent of stakeholders, and the achievement of objectives as the reason resources were committed and used in the first place. The absence of clearly defined goals and objectives is an issue too.

While these three Es are key to the practice of performance and value-for-money audits, there are another five elements that are also important.

  1. Ethics: Ethics are defined as the moral principles that govern a person’s behavior. It also applies to organizations to the extent that the individuals leading, managing, and working within or for the organization make decisions that contain moral elements. Ethics are an essential ingredient in well-functioning entities and ethical breakdowns can be very costly. While internal auditors typically examine dynamics one organization at a time, all auditors’ work aims to curtail fraud and corruption that in the aggregate affects entire economies. We do not examine business transactions in a vacuum, because an unethical employee could falsify company records or engage in other inappropriate actions harming the company, colleagues, vendors, customers and the public.

  2. Ecology: Organizations must adhere to environmental rules, laws, and regulations that protect the air, water and soil. Even when there is no specific guideline or existing ones are not enforced, there is a broad-based consensus that for-profit and non-profit organizations must respect the environment they operate in. Stakeholders have become less tolerant of organizations that pollute or obtain their needed resources through questionable or less than environmentally friendly ways. Note for example the demands for use of renewable energy and the reporting of the carbon footprint. Organizations cannot ignore the importance of environmental stewardship and must act as responsible corporate citizens. 

  3. Equity: This applies to the idea of treating everyone fairly. While many instinctively relate this concept to compliance with fair labor laws, like hiring, termination, and fair pay, the concept is much broader. Organizations should examine their practices to verify that they also adhere to the principles of equity when promoting employees when dealing with customers and suppliers, and in their interactions with the communities where they operate. Unfairness is noticed and it negatively impacts organizations in the short and long terms. This can be evidenced, for example, in institutional turnover metrics where bright, dedicated and ambitious employees leave the organization when they are not treated fairly and come to the conclusion that promotions are based more on political gamesmanship than merit.

  4. Excellence: This relates to the performance of work with high quality. Every audit should include in its review process an examination of the degree to which the work performed by the program or process is of high quality, and all interactions are characterized by an element of superior customer service towards others. In the for-profit sector, poor workmanship and lack of reliability carry the risk of higher returns, warranty claims, complaints, customer turnover, and broken reputations.  In government and non-profit entities, errors, sloppiness, delays, and apathetic service damage reputations and cause political damage. Poor quality is frowned upon in developed and developing countries alike, and internal auditors should help management stop its manifestation wherever it may occur.

  5. Emotion: This relates to the collection of emotional dynamics that drive organizational performance to success, dysfunction or outright failure. Healthy organizations typically have high levels of engagement, teamwork, camaraderie, peer support, respect, and bonding. Employees share a common vision and mission that unites them, and they are emotionally connected to the enterprise and each other. Empathy results in the fair treatment of colleagues, customers, local community members, and other key stakeholders, often evident in respectful relations, responsiveness and care. As the #MeToo movement so clearly shows, seemingly successful organizations can harbor very unhealthy dynamics. These behaviors, attitudes, and feelings are a key component of the organization’s corporate culture and show that feelings matter.

The 8 Es are a very useful tool when applied as themes during the development of audit programs or subsequently during fieldwork and reporting. Include the 8 Es when developing interview questions, when providing status updates to the client, when conducting exit meetings and even when writing audit reports. Business leaders should be focused on these items and auditors conducting performance audits should too. The 8 Es is a simple formula that can help you during performance and value-for-money audits to determine if the organization is truly thriving.

Interested in learning more about this and other tools and techniques? Join Dr. Murdock when he teaches Lean Six Sigma Skills for AuditorsInternal Audit School, and High-Impact Skills for Developing and Leading Your Audit Team.   

Photo by Rikki Chan on Unsplash