control, and governance
control, and governance
April 2006
Reforming the Audit Function
A Dutch government audit group redefines its role in the organization and broadens the department's sphere of influence.
Peter Pennekamp
Director General, Netherlands Ministry of Internal Affairs
Peter J.J. Vlasveld, CIA, RA
Audit Manager, Netherlands Ministry of Finance
Over the past several years, the Netherlands central government audit function has undergone a significant transformation. The administration's 12 ministries, which operate within the Dutch government's 125 billion euro (US $149 billion) budget, each have their own audit department ranging from 35 to 170 full-time employees. Once financially oriented and traditional in nature, the departments recently adopted a modern approach to internal auditing and broadened the scope of their activities to include operational and information technology (IT) reviews.
The changes were prompted by a significant policy shift across the central government. In the late 1990s, the Dutch Parliament began requiring central government agencies to report not only on their financial performance, but also on the results of policy and the effectiveness of government activities. The audit function embarked on its modernization initiative to accommodate this dramatic shift, and to prepare auditors for a new era of value-added practice.
THE PROCESS BEGINS
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Project Team Support During the audit reform process, the Netherlands' central government's Quality Plan team provided several forms of support to the individual ministries, including:
Several of these activities took place in collaboration with both IIA–Netherlands and The Institute's headquarters, as well as many of its members from the private sector. In 2004, for example, the institutes held an international conference in Amsterdam for government auditors. Practitioners from 26 countries attended the event, sharing their knowledge and experience. The conference helped strengthen ongoing improvement by giving the reform effort exposure to other government officials locally, as well as by sharing progress with colleagues from around the globe. |
In 2001, the Ministry of Finance issued a report titled, "Implementation of Central Government Audit Function Quality Plan," which was drafted by a team of experts and advisers from both national universities and the government's Central Court of Audit. The group was asked to provide suggestions for better aligning audit activities with the government's new reporting requirements. Team members helped develop goal-setting procedures and reports, as well as financial data.
Based on the report, the Dutch government approved a formal Quality Plan in 2002. The plan's primary goal was to improve the performance of central government audit departments via four main objectives:
- Providing ministerial audit committees with active, managerial responsibility for the entire audit function, from financial audits to reviews of operational management and policy implementation.
- Investigating the possibility of forming interministerial pools of audit specialists.
- Expanding the scope of ministry audit departments to include additional activities, such as operational and IT auditing, and granting these activities equal status with financial auditing.
- Providing additional investments in human resource management, to support the audit departments' expanded scope.
The plan called for each of these objectives to be accomplished by the end of 2004. It also required a full-fledged, multifunctional audit department to be operational at every ministry by this same time. In 2002, the government established a new project team composed of highly qualified civil servants to support the individual ministries, particularly their audit departments, during implementation of the proposed changes. This support took a variety of forms, including those listed in "Project Team Support," at right.
The team issued a final report on the project at the end of 2004. Many of the Quality Plan's objectives have been achieved, though some still require additional, ongoing attention.
Audit Committees
Dutch central government audit committees differ from those in the country's private sector. At present, they function more like operational management committees than independent monitoring agencies.
Since the Quality Plan was implemented, almost all of the central government's audit committees have expanded the scope of their activities to encompass the entire audit function, including investigations of operational management. In addition, the project team, in cooperation with its university members, developed a short refresher course to help reacquaint committee members with some of their less-routine duties. The course also clarified the role of the committee chair and detailed performance expectations for each of the committee's members.
In its final report, the project team provided several recommendations aimed at improving audit committee effectiveness. One of them was to bring in one or more outside members with specific expertise and relevant experience. Experts and independent outsiders with an affinity for public administration force senior officials to tighten up their management style. Moreover, these specialists provide support for members of political management (ministers and junior ministers) who are not in a position to supervise day-to-day ministry activities but are nonetheless politically accountable for them. During the past few years, several ministries have already experienced positive results with outside committee members, and others have recently recruited outsiders or are planning to do so in the near future.
Audit Specialties
The Quality Plan project team, in conjunction with an interministerial committee, conducted a study of ministerial audit departments that identified several specialties within the departments, including IT, forensic, and environmental auditing. In most cases, IT audit expertise was already clustered with an electronic data processing audit pool within the central government. The pool provides IT audit services to all of the ministries, and it has become instrumental to improved cooperation.
To address other areas of expertise, plans for establishing a pool of audit specialists have also been under development. Ideally, these individuals would be seconded to other ministries on a temporary basis while remaining in the employ of their home ministries. This type of resource would be particularly relevant to ministerial and interministerial investigations, which require a great deal of capacity on short notice for activities such as forensic and other fraud-related investigations. Moreover, keeping the service in house would likely be more cost effective than outsourcing the work to third parties.
One concrete outcome of the plan so far has been the creation of a database that lists audit specialists within central government, as well as completed and proposed specialized audits. Reports from the database helped familiarize members of the project team with audit activities and resources. The repository was also integral to the success of interministerial activities.
Department Structure
Most of the central government's audit departments have completed the transition to modern 
audit practice. For some departments, however, cuts in personnel budgets have presented additional challenges. Because the government's annual financial audit process demands a minimum resource commitment, these departments have been unable to devote adequate attention to certain types of audits that fall under operational management's investigation function. "Average Department Capacity Distribution" at right (click to enlarge) contrasts the capacity distribution for audits performed by the Dutch government audit departments with the averages of other groups.
To develop a full-fledged audit department that can contribute to effective and efficient public administration, the operational audit function needs to be given a more prominent position within the audit organization. Enabling anyone at the ministry to take advantage of the function's services would help ensure accessibility to internal auditing's value-added capabilities. Moreover, this structural change would increase the audit department's ability to achieve its full potential as a governmentwide support function.
Once all audit departments have completed the transition to multifunctional service, government and Parliament will have an opportunity to consider whether the opinion on its financial statements should be provided by an external organization. The project team recommended addressing this issue in the near future, given its impact on the public and parliamentary image of the civil service. Moreover, concerns over auditor independence have brought increased attention to how organizations handle financial statement opinions.
Personnel Training
During the transformation process, the central government audit departments devoted considerable effort toward effecting structural change and expanding their services. Technical training for staff comprised a key aspect of this campaign. With the help of experts outside the government, ministries have been able to develop skills-training courses for the ministry auditors.
By contrast, communication skills and client service management received relatively little attention during the training process, even though these skills are critical to the central government's audit operations. Communication weaknesses became particularly evident through the departments' performance on new tasks. In two pilot projects, for example, several communication glitches occurred between clients and auditors.
To address this challenge, the project team launched a program aimed at increasing audit managers' awareness of their role in the reform process and explaining the opportunities it creates. Most audit directors participated in general management courses, as well as sessions that focused on more fundamental skills such as presenting unpopular results to audit clients and cooperating with other disciplines.
Few managers within the ministries have explored options for leveraging the full capacities of 
audit staff, such as using the department as a tool for management, though steps toward remedying this situation have already been implemented. Opportunities for leveraging internal auditing are discussed in the general management courses, and some auditors have been appointed at policy lines. Greater mobility between the audit departments and the Ministry of Finance's audit policy directorate, and among the audit departments themselves, would also help improve staff quality.
In the coming years, members of top management will need to take additional measures to ensure their audit departments are truly multidisciplinary. "Staff Experience" at right (click to enlarge) shows that, relative to other groups, ministerial audit staffs possess little experience outside the audit profession.
Coordination
The central government's audit and control functions are working together to improve the quality of operational management. Evidence of this teamwork can be found in cooperative risk analysis activities within the ministries. In addition, rivalries no longer exist between auditing and control with regard to conducting investigations. In the past, individual performance drove the activities of both groups. The government's shift in emphasis toward goals for the total organization helped foster greater teamwork.
FOLLOW-UP
Issuance of the Quality Plan team's final report marked the reform project's formal conclusion. Unfortunately, the added value of pursuing change through an upper-ministerial project team is now outweighed by the associated costs. Nonetheless, the transition toward a broad-based audit function within the Dutch central government has not yet ended. The reform process will likely continue with full vigor in the years to come.
The responsibility for maintaining a well-functioning, dynamic audit function lies mainly with the individual ministries — the Ministry of Finance, in particular, has an important role in steering the transition. Activities required to sustain auditing's progress include creating an oversight system, developing a shared knowledge repository, reflecting further on joint personnel policy, and applying benchmarks. In addition, important contributions can also be made across all ministries. The Quality Plan team, for example, recommended that ministries provide an evaluation of audit activities in their annual report to Parliament.
Full modernization across the audit function will also require a sustained culture of improvement. Risk management and operating effectiveness need to become second nature — not just to members of the audit function, but to everyone in the central government. Moreover, because of the strong links between the government's policy, operational management, and resources, cooperation and coordination among all parties — including the audit departments, senior and line management, and Parliament — is essential. Transition processes affecting individual links cannot take place in isolation.
To comment on this article, e-mail the authors at ppennekamp@theiia.org.
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