Performance audit: examining economy, efficiency and effectiveness

A performance audit is an independent examination of whether an institution uses its resources economically, efficiently and effectively to achieve its objectives.

For accounting officers, accounting authorities and audit committees across South African public institutions, it gives insight into value creation, the stewardship of public money, and the delivery of policy.

How a performance audit differs from a financial audit

Distinguishing the financial audit from the performance audit is essential to a complete picture of accountability. A financial or regularity audit focuses on reporting integrity — whether the financial statements fairly present the position and whether transactions comply with the accounting framework and the law. Where the financial audit asks whether the records are accurate and free from material misstatement, the performance audit asks whether public resources were turned into tangible public value.

Under the Public Audit Act and the Constitution, the Auditor-General South Africa holds a mandate to conduct performance audits that look beyond the financial statements. In exercising it, the Auditor-General South Africa independently assesses the stewardship of public funds, the implementation of government policy, and the measures management has put in place to procure resources economically and use them efficiently and effectively. So financial auditing safeguards fiscal compliance while performance auditing evaluates operational execution and impact.

The three Es of public value

At the core of performance auditing is the systematic evaluation of three interconnected criteria — the three Es: economy, efficiency and effectiveness. Economy examines the input side: whether the institution acquires resources of the appropriate quality at the lowest reasonable cost. Efficiency examines the relationship between inputs and outputs: whether the institution gets the most service output from a given set of resources, or uses the least resource for the required output. Effectiveness examines outcomes: whether the outputs actually achieve the intended objectives and policy goals.

These principles are anchored in the framework governing public finance. The PFMA as administered by National Treasury sets an outputs- and accountability-driven approach that replaces rigid administrative rules with performance-based management. Under it, public financial management aims to promote good governance and maximise service delivery through the efficient, effective and economical use of limited state resources. The accounting officer is charged with managing implementation against predetermined objectives, which makes performance evaluation a core part of statutory accountability.

Planning the audit around predetermined objectives

To deliver objective insight, a performance audit is structured around the institution's own planning documents and predetermined objectives. A public institution sets strategic plans and annual performance plans that lay out its targets, service-delivery commitments and expected outcomes. In its work, the Auditor-General South Africa examines the annual performance report that management submits and evaluates the reporting against those predetermined objectives, to determine whether the reported service-delivery information is useful and reliable in all material respects.

Evaluating usefulness means assessing whether the indicators and targets are clearly defined, measurable and logically linked to the mandate. Evaluating reliability means verifying that the published results are valid, accurate and complete — substantiated by verifiable operational records. By auditing the performance information, the Auditor-General South Africa gives the reported service-delivery picture credibility, so oversight bodies, legislatures and citizens can judge institutional performance accurately.

Under the Public Audit Act and the Constitution, the Auditor-General South Africa holds a mandate to conduct performance audits that look beyond the financial statements.

— Synthesis of South African regulatory guidance

Evidence: the question-and-criteria structure

Unlike a financial audit that leans on standardised accounting rules, a performance audit is built around a question-and-criteria structure tailored to the operational area. The work begins with an explicit question — whether resources were managed economically, efficiently or effectively in a specific programme or function. To answer it, the auditor sets clear criteria: the expected standard, drawn from legislation, policy or accepted management practice.

The auditor then compares the actual condition observed in the field against those criteria to find any performance gap. Where a gap exists, the audit analyses the cause — why actual performance deviated from the expected standard — and evaluates the effect on public service delivery. Grounding the conclusion in that criteria-condition-cause-effect structure keeps a performance-audit finding resting on verifiable, objective and sufficient evidence rather than opinion.

Management response and improvement

The ultimate purpose of performance auditing is to encourage learning, prompt reform and drive continuous improvement — not to assign blame. A performance-audit finding gives leadership practical, evidence-based recommendations to resolve a systemic bottleneck and improve resource management. Under the PFMA as administered by National Treasury, accounting officers and accounting authorities must review audit findings in good time and approve targeted action to address the control deficiencies and operational weaknesses identified.

An institution need not rely on the external audit alone. Under the National Treasury Internal Audit Framework, an adequately resourced internal audit activity can conduct its own performance-focused, value-for-money reviews as part of its approved plan — evaluating whether resources are acquired economically, used efficiently and applied to achieve the programme's objectives, and giving management early warning of operational risk. By running internal performance reviews, the accounting officer can correct an inefficiency proactively, so public resources keep generating value.

What good looks like

For a South African department, constitutional institution or public entity, good is an integrated performance-management architecture where economy, efficiency and effectiveness guide the administrative decision. Accounting officers and accounting authorities under the PFMA set clear predetermined objectives in the strategic plans and hold operational discipline across procurement, asset management and service delivery. Public funds are spent judiciously, inputs are turned efficiently into outputs, and the outputs deliver the intended policy outcomes.

In a high-performing institution, an independent internal audit activity under the National Treasury Internal Audit Framework runs regular value-for-money reviews to test effectiveness and surface bottlenecks ahead of the external audit. The performance information in the annual report is valid, accurate and complete, meeting the usefulness and reliability standard the Auditor-General South Africa assesses. And leadership treats the findings from an Auditor-General South Africa performance audit as a catalyst for reform, turning the insight into sustained operational improvement and greater public trust.

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