6 Accountability and Auditing in The Public Sector (Nota)

Accountability and
7 Auditing in the
Public Sector
Learning Outcomes
 Discuss the concepts and principles of public

accountability in the public sector
 Understand the roles and responsibilities
related to the audit function in the public sector
 Discuss audit practices in the public sector
 Discuss selected audit and accountability
issues
Public Sector Accounting Governance and Accountability in the Malaysian Context All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2019 7–2
Introduction
 Public sector financial management is a mechanism

that deals with public money and public property.
 Ensuring the proper use of public money in accordance
with the prevailing rules and procedures, as well as
effective and efficient delivery of programmes and
activities to fulfil the public needs and demands.
 Accountability is crucial to a country as it creates an
effective control to ensure management of public
moneys is in accordance with applicable laws and
regulations.
Introduction (cont.)
 In the governance prospective, accountability is more

often defined as an account giving relationship between
individuals.
 The accountability index rating is introduced by National
Audit Department to assess the financial management
of government entities. It is conducted in two main
categories, i.e. mandatory and rotational. The former is
implemented yearly and the latter takes place once in
every three years.
Public Sector Accountability
 The term ‘accountability’ refers to an obligation of an

individual or organization to account for its activities,
accept responsibility for them, and to disclose the
results in a transparent manner.
 This term also carries the same meaning to public
sector accountability which concerns ‘who is
accountable to whom for what’ and that civil servants,
organizations and politicians are held accountable for
their decisions and performance.
 It can represent democratic values and ensure that the
power is used appropriately and in accordance with the
public interest.
(cont.)
The Concepts and Principles
 The Malaysian government has undertaken

several significant measures in promoting good
governance, accountability and transparency.
(cont.)
Chain of Accountability
 Historically, the concept of accountability is closely

related to accounting, which emanated from
bookkeeping.
 Nowadays, It has moved beyond its bookkeeping origins
and has become a symbol for good governance in the
public sector.
(cont.)
 Such governance requires an effective and efficient

management of the assets and resources and the
establishment of a model to ensure that the country’s
financial management responsibilities are well-
functioning.
 The practice of accountability in Malaysia is the

responsibility of the following bodies:
1. Parliament
2. Treasury
(cont.)
3. Various agencies (ministries, departments and

statutory bodies)
4. National Audit Department
5. Public Accounts Committee
(cont.)
 Parliament - an institution that maintains control towards

the ruler where it acts as a supervisor, a controller and a
critic against the governmental governance and
structure, and it can influence the policies of the
government.
 As part of the Parliament,
1. The Public Accounts Committee (PAC) - responsible
for examining the reports given by the National Audit
Department (NAD) and the Accountant General’s
Department (AGD) which have been tabled in
Parliament.
(cont.)
2. The AGD - responsible for recording financial

transactions and preparing the accounts for both the
federal and state governments.
 The accounts, which are prepared by the AGD are
submitted to NAD before being submitted to the PAC.
 The auditors perform audits on the submitted accounts to
ensure that all information is credible and trustworthy for
reporting purposes.
(cont.)
 The Treasury - responsible for preparing policies, as

well as designing process and procedures to ensure
effective and efficient management of public sector
funds e.g. prepare annual budgets in an attempt to
ensure that the country is not in deficit.
(cont.)
(cont.)
 Process of how accountability is discharged by the
Malaysian government:
 The accountability process in the Malaysian government is

started by the Treasury, the Treasury plays an important role as
it distributes information (call circular) for use by other
mechanisms.
 The responsibility centres will use the call circular to prepare an
expenditure budget.
 The budget will be submitted back to the Treasury for budget
consolidation and tabled in Parliament for approval.
 The responsibility centres will receive an allocation warrant and
the AGD will receive a general warrant.
 The responsibility centres will record all transactions during that
year and submit them to the accounting offices.
 The accounting offices will transmit the data daily to the
Accountant General’s Department.
 The AGD will be very busy at the end of the year because it
needs to prepare financial statements.
 The financial statements will be audited by the National Audit
Department before being submitted to and tabled in Parliament
for approval.
 The Parliament is assisted by the PAC to ensure that money is
spent according to the purpose and programmes as approved in
the budget.
Public Sector Auditing
 In the accountability process,

 accounting plays a role in establishing evidence by
way of documenting, classifying and recording
transactions
 auditing is to prove the existence of such evidence.
 Auditing in the public sector - highly regulated by
statutes and operates in an environment different from
the private sector, causing public sector audits to have
different procedures, different responsibilities and a
wider role. What is more, with the complex nature of
public sector bodies, auditing is less straightforward
than in the private sector.
Public Sector Auditing (cont.)
Institutional mechanisms to Malaysian Anti-Corruption To detect and prevent fraud and corruption in the
strengthen public Commission, the House of public sector in Malaysia and their corresponding
accountability in Malaysia. Representatives, the National Audit perceived effectiveness from the accountants’ point
Department, the Public Complaints functions of view.
Bureau, as well as media and civil
society groups.
 The role of the Auditor General of Malaysia - to aid

accountability by conducting independent audits on the
accounts of the federal government, state governments
and federal statutory bodies, as well as the activities of
the ministries, departments, agencies and companies
under the federal and state governments.
 The Auditor General - empowered to undertake, among

other things, a detailed audit of all government
accounts, accounts of ministries and state-owned
enterprises, and accounts of local government bodies
and companies whose majority share is owned by the
government.
The Legal Environment

 In Malaysia, the laws related to auditing are intended
to provide frameworks to audit government entities.
There are provisions related to public sector auditing
provided by a number of frameworks.
Federal Constitution
 Articles 105, 106 and 107 spell out the matters
regarding the appointment, powers and duties as well
as the reports of the Auditor General.
Audit Act 1957
 The Audit Act 1957 (Amended 1978) is an Act to make

provision for the audit of the accounts of the
Federation, of the states and of the certain other
authorities and specified bodies.
 The Act not only provides the framework within which

audit of the government is required and enacted, but
also the basis for the scope and type of audit
necessary for public bodies.
 The Act does not state the manner in which audit of

public bodies is to be performed. The audit procedures
therefore become the discretion of the Auditor General
but must be in accordance with generally accepted
auditing standards.
Types of Public Sector Auditing

 Public sector audit is carried out in two phases, i.e.
1. The interim audit (conducted to test the
effectiveness of internal controls)
2. Final audit (conducted with the aim to ensure
existence, completeness, ownership, obligation,
occurrences, validity, accuracy, presentation, disclosure
and regularity).
• Conducted annually
• To determine whether the annually prepared financial
statements show a true and fair view of the financial
position and whether the government entities have
complied with all legal and regulatory requirements.
Financial audit
• A cyclical audit conducted to guarantee that all financial records

of ministries,
departments or agencies are consistent with the rules and regulations.
Final Audit • Objective - to determine whether the government’s financial
management
has been carried out in accordance with relevant laws and financial
regulations.
Compliance audit • Includes studies and evaluation of certain programmes and activities in
reaching their goals and objectives.
• The aspects of economy, effectiveness and efficiency are the main focus.
• Necessitates investigation, reviews and reports.
Performance audit
Internal Controls and the Audit Functions

 Auditing is a type of systematic and organized process.
The audit work is performed by an independent person
(auditor) by collecting and evaluating records of
quantifiable information (e.g. books of accounts, statutory
records and vouchers) of an organization.
 The main aim of auditing is to ensure that the decisions

and reports made on the financial information are in line
with established criteria.
 In general, the auditing process consists of six steps:

1. An auditor must first understand his client or
organization, both internally or externally.
2. The auditor needs plan and strategize the audit.
3. The auditor has to carry out fieldwork by gathering
useful information and find the relevant evidence.
4. Analysis ‒ the auditor needs to carry out evaluation
and assessment on the effect of the evidence provided
previously.
5. From the evaluation result, he has to provide

professional comment.
6. The auditor has to generate reports and specific
documents by using the financial information that was
obtained from his client.
 Two types of audits

Internal audit External audit
 Refers to the investigation,  An investigation conducted on an

supervising and analysis of an organization’s financial statements
organization’s operational activities.
 Three types of audit procedures, i.e.
 This kind of audit is mainly financial audit, compliance audit and
performed to improve the performance audit.
organization’s performance by
making its processes of risk  Purposes - to provide further support
management, control and and evidence towards the
governance more effective. trustworthiness of accounts provided Auditing is a very crucial
by the audited organization. aspect in maintaining public
accountability and in practicing
better governance as a public
auditor handling public funds.
Roles and Responsibilities

Auditors provide insight to their clients
Explains how auditors find any
by differentiating the workability
party that performs illegal
of programmes and policies set. They
acts and then provide proof to
will then benchmark the results at
support their decisions to take
all government levels and make sure
legal action
that the most satisfactory results are
against that party.
obtained.
Roles of Audit
Oversight Detection Deterrence Insight Foresight
Describes whether Auditors act as a Auditors foresee the future to

government entities are deterrence by identify threatening risks.
discharging their minimizing the This is very crucial as it helps
responsibilities appropriately, likelihood for corruption managers to understand the
particularly in terms of to occur. organization’s current
spending funds and situation and to plan for risk
complying with the prevailing assessment.
laws and regulations.
Duties and responsibilities of the Auditor General

 The responsibility of the Auditor General - to confirm that
acceptable protections have been taken to secure the
accumulation and keeping of public moneys.
 Section 5 of the Audit Act 1957 broadly mentions the
roles and responsibilities of the Auditor General.
 External audit in the government - performed by the
National Audit Department, headed by the Auditor
General.
 Three types of audit being carry out which are financial
audit, compliance audit and performance audit.
Public Accounts Committee

 The Public Accounts Committee (PAC) is a committee
established by Parliament to review the expenditure of
public funds and to report its findings of the government
budget audit.
 The PAC is an independent body in which:
1. it is appointed by the House of Representatives (or
Parliament) or State Council at the earliest possible
time after the beginning of each parliament session
2. it has not fewer than 6 and not more than 12
members
3. it consists of members of Parliament and the State

Legislative Assembly
4. it should not appoint or nominate a minister to act as
chairman to the committee.
 The PAC has been empowered by order 77(5) of the

Standing Orders of the House of Representatives to:
1. check and analyse the accounts of the federal, state,
and local governments, as well as the Auditor General’s
Report (in accordance with Article 107 of the Federal
Constitution)
2. monitor the accounts of the federal government and

the appropriation of the amount granted by Parliament
to meet the public spending in which the accounts of
public authorities and other bodies administering public
fund may be laid before the Parliament
3. make sure that the money is spent economically and
efficiently
4. sustain the public morality standards
5. assume such other matters as the committee may
think fit or which may be referred to the committee by
Parliament.
Audit Practices in the Public
Sector
 Three parts of activities that are included in financial

management are general financial activities, budget
activities and procurement activities.
 The objectives of auditing are as follows:
1. To make sure rules and regulations are complied
with.
2. To determine whether the financial statements show
a true and fair view on the accuracy of the records in
accordance with the accepted auditing standards.
Sector (cont.)
3. To find any wrongdoings in relation to the principles,

orders, rules and laws.
4. To point out the elements which fail to affect the
effectiveness, efficiency and economical utilization of
resources.
Performance Audit (Value-for-money Auditing)

 Performance audit are carried out on a periodic basis.
 Referred to as a utility derived from every purchase or
every sum of money spent.
Sector (cont.)
 Based not only on the minimum purchase

price (economy) but also on the maximum
efficiency and effectiveness of the activity or money
spent.
 Shows the principal–agent relationship in the context of
the public sector.
Sector (cont.)
Principal-agent
relationship
Sector (cont.)
 Some important issues that arise from the relationship

between the principal and its agents are listed.
 In addressing the issues highlighted, there is a need for

public sector auditors to remain grounded in the core
governance process, while at the same time expanding
the focus of the public sector auditing to include the
governance mechanisms which encompass effective
management control systems and efficient programme
deliverables.
Sector (cont.)
 The governance process encompasses the following

aspects:
 Independence from the parties being audited and an
objective perspective towards the subject under audit
 Use of organized processes to collect and analyse
relevant and suitable evidence
 Comparison to criteria for formulating conclusions
 Use of generally accepted professional audit
standards.
Sector (cont.)
Issues in the relationship

between the principal and
agents
Sector (cont.)
Audit of the Federal Government
 In Malaysia, the Auditor General is regarded as an

officer of the general public service whose role is
provided in the Federal Constitution and under the Audit
Act 1957. Thus, whatever laws currently in force that
applies to the public service shall apply to him.
 In discharging his roles as a public sector auditor, the
Auditor General should examine whether or not the
following aspects are appropriately considered:
Sector (cont.)
(a) all reasonable precautions have been taken to

safeguard the collection and custody of public moneys
or other moneys subject to his audit
(b) payments have been made and charged in
accordance with proper authority and supported by
sufficient evidence
(c) due care has been taken to ensure proper use,
control, maintenance and disposal of all public stores or
other stores subject to his audit
(d) all accounts and other records have been and are
properly and faithfully represented and maintained
Sector (cont.)
(e) moneys have been spent for lawful activities in an

efficient manner
(f) the provisions of the Federal Constitution and of the
Financial Procedure Act 1957 and any other laws
relating to moneys or stores subject to his audit have
been complied with.
 The powers of the Auditor General in performing of his
audit functions are provided by section 7 of the Audit Act
1957. He is empowered to:
(a) require any explanation and information from any
person in discharging his duties
Sector (cont.)
(b) search and extract books, documents or records in

any public office without any restrictions
(c) access all records, books, vouchers, documents,
cash, stamps, securities, stores or other property subject to
his audit
(d) examine the oath or affirmation of any person that he
is empowered to administer
(e) authorize any public officer on his behalf to conduct
any inquiry, examination or audit, and
(f) obtain the advice of a law officer concerning any legal
issues.
Sector (cont.)
Audit of the Local Governments

 The local government or local authority has the power to
collect taxes (in the form of assessment tax), to create
laws and rules (in the form of by-laws) and to grant
licenses and permits for any trade in its area of
jurisdiction, in addition to providing basic amenities,
collecting and managing waste and garbage, as well as
planning and developing the area under its jurisdiction.
Sector (cont.)
 In the context of the Malaysian local governments, the

law has empowered the Auditor General or another
auditor appointed by the State Authority on the
recommendation of the Auditor General to inspect and
examine a particular financial year’s accounts of the local
authority.
 The Auditor General or appointed auditor is expected to
ascertain that:
(a) the accounts of the local authority are in order
(b) separate accounts of all commercial undertakings are
properly maintained
Sector (cont.)
(c) the accounts present a true and fair view of the

financial position of the local authority and of the
commercial undertakings
(d) due provision has been made for redemption and
repayment of all moneys borrowed by the local authority
(e) the amount set aside for depreciation and renewal of
the assets of the local authority is adequate, and
(f) all the requirements of the auditor have been
complied with.
Sector (cont.)
 The auditor is expected to express his

opinions through an audit report.
 The audited accounts will be presented to the local

authority at a meeting and published
 A copy of the statements and accounts is then

forwarded to the State Authority for a presentation to
the State Legislative Assembly and the House of
Representatives.
Audit Report
 The reports may contain recommendations and comments

upon all matters relating to public accounts, public
moneys and stores and may also cover matters related to
special funds such as zakat, fitrah and baitulmal.
 Audit reports related to the federal government need to be
submitted to the Yang di-Pertuan Agong and laid before
the House of Representatives in Parliament (Article 107 of
the Federal Constitution).
Audit Report (cont.)
 At the state level, audit reports are to be submitted to the

Ruler of the state and laid out before the State Legislative
Assembly.
 In a performance audit, a summary of the audit is

presented in Parliament or the State Legislative Assembly
(where appropriate). The report explains the activities
audited, weaknesses identified and appropriate
recommendations.
 The Statutory Bodies (Accounts and Annual Reports) Act

1980 provides that the accounts of all statutory authorities
be audited by the Auditor General and that his reports be
presented to both Houses of Parliament as soon as
practicable by the respective ministers of the different
ministries concerned (within one month of the receipt of
the audited statements). After tabling in the legislature, the
audit reports are referred to the PAC, which reviews them
and makes appropriate recommendations.
 In contrast, the reports of commercial accountants on the

accounts of public enterprises, which operate as
companies under the Companies Act, are not required to
be presented to the legislature.
Issues and Challenges
 Such concern has arisen following the ineffective role of

controlling officers, weaknesses in planning and
implementation, incompetent financial management and
cost control, and massive breaches of laws and
regulations, which have progressed along with the
expansion and transformation of information technology
(IT) and information systems (IS).
Threat from IT and IS
 In this era of globalization, IT and IS have had positive

impacts on the public sector.
 Despite these positive impacts, one should not neglect
the fact that IT and IS have also caused negative
impacts to the delivery of public services and
accountability when used inappropriately.

 The following points delineate some of the negative

impacts of IT and IS on the public sector:
1. The delivery of information via IT and IS has been
uneven and inconclusive. For example, much
information has been supplied by those with the
financial influence or political power.
2. Data may be taken at face value and cross-checking
channels and procedures may be ignored.
Computerized record is also more intangible and
malleable than paper-based record.
3. Human input in the decision-making process is

reduced, making it difficult to trace who is responsible for
the decision.
Scandals on the Rise
1. Embezzlement of RM 1.5 billion in Sabah
2. Embezzlement of the Skills Development Fund by
minister’s political secretary
3. Sabah Water Department corruption scandal
4. Tanjung Bungah tragedy—Approval of project was
given by Penang state government after rejection by
Department of Environment
Learning Outcomes
 Discuss the concepts and principles of public

accountability in the public sector
 Understand the roles and responsibilities
related to the audit function in the public sector
 Discuss audit practices in the public sector
 Discuss selected audit and accountability
issues

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6 Accountability and Auditing in The Public Sector (Nota)

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Accountability and

 Discuss the concepts and principles of public

 Public sector financial management is a mechanism

 In the governance prospective, accountability is more

 The term ‘accountability’ refers to an obligation of an

The Concepts and Principles

 The Malaysian government has undertaken

 Historically, the concept of accountability is closely

 Such governance requires an effective and efficient

 The practice of accountability in Malaysia is the

3. Various agencies (ministries, departments and

 Parliament - an institution that maintains control towards

2. The AGD - responsible for recording financial

 The Treasury - responsible for preparing policies, as

 The accountability process in the Malaysian government is

 In the accountability process,

 The role of the Auditor General of Malaysia - to aid

 The Auditor General - empowered to undertake, among

The Legal Environment

Audit Act 1957

 The Audit Act 1957 (Amended 1978) is an Act to make

 The Act not only provides the framework within which

 The Act does not state the manner in which audit of

Types of Public Sector Auditing

• A cyclical audit conducted to guarantee that all financial records

Internal Controls and the Audit Functions

 The main aim of auditing is to ensure that the decisions

 In general, the auditing process consists of six steps:

5. From the evaluation result, he has to provide

 Two types of audits

 Refers to the investigation,  An investigation conducted on an

Roles and Responsibilities

Oversight Detection Deterrence Insight Foresight

Describes whether Auditors act as a Auditors foresee the future to

Duties and responsibilities of the Auditor General

Public Accounts Committee

3. it consists of members of Parliament and the State

 The PAC has been empowered by order 77(5) of the

2. monitor the accounts of the federal government and

 Three parts of activities that are included in financial

3. To find any wrongdoings in relation to the principles,

Performance Audit (Value-for-money Auditing)

 Based not only on the minimum purchase

 Some important issues that arise from the relationship

 In addressing the issues highlighted, there is a need for

 The governance process encompasses the following

Issues in the relationship

Audit of the Federal Government

 In Malaysia, the Auditor General is regarded as an

(a) all reasonable precautions have been taken to

(e) moneys have been spent for lawful activities in an

(b) search and extract books, documents or records in

Audit of the Local Governments

 In the context of the Malaysian local governments, the

(c) the accounts present a true and fair view of the

 The auditor is expected to express his

 The audited accounts will be presented to the local

 A copy of the statements and accounts is then

 The reports may contain recommendations and comments

 At the state level, audit reports are to be submitted to the

 In a performance audit, a summary of the audit is

 The Statutory Bodies (Accounts and Annual Reports) Act

 In contrast, the reports of commercial accountants on the

 Such concern has arisen following the ineffective role of