Abstract

This practical paper aims to clarify the theoretical aspects of public financial management and highlight an internationally recognized framework supported by the latest global standards and practices. It also presents the fundamental concepts of the various types of external auditing and the reasons for integrating them when implementing a specific audit engagement in a manner that allows

for multiple levels of assurance. This approach helps avoid the problems associated with examining broad areas using only one specific type of external audit.

The paper concludes with several findings, the most prominent of which is the need for administrations concerned with financial affairs to diversify and integrate the types of auditing used to verify their performance. It also recommends the necessity of creating a combined approach among the available types of external auditing.

Introduction

Public finance holds an important and distinctive position in the life of states and societies. It represents the backbone of the establishment and continuity of the state and serves as a mirror reflecting the reality of its overall conditions. Sound management of public finance is undoubtedly one of the most important pillars upon which governments rely in implementing their plans and policies and achieving their strategic objectives.

In order to enhance this management and improve its performance levels, it is necessary to adopt or develop purposeful practices that ensure the integrity of the functions performed and the achievement of objectives. To strengthen the reliability of this administration, continuous evaluation and effective control over its various aspects are essential.

Undoubtedly, conducting comprehensive auditing processes efficiently and effectively on these aspects, identifying corrective responses, and implementing them contributes to strengthening public accountability practices and supporting necessary reforms. This.

Public Financial Management

Public financial management has historical roots dating back to ancient times when public finance first emerged. It has evolved alongside historical developments and has become an essential component of the structure and entity of the state (Nandolo, 2016:1). Public financial management represents a set of legislation, principles, rules, and financial procedures adopted and applied by governments in managing and organizing the main elements of a country's finances. These include estimating and collecting public revenues, estimating and spending public expenditures, as well as preparing, approving, implementing, and monitoring the general budget (Bandy, 2023:3–4). Moreover, it also encompasses procedures aimed at creating integration between fiscal and monetary policies in a manner that supports the national economy and achieves sustainable financial development (Cangiano et al., 2013:2).

Objectives of Public Financial Management

Public financial management aims to achieve economic stability by controlling levels of expenditure and sources of revenue, as well as efficiency in the use of resources through allocating them effectively and efficiently to maximize their benefits. It also aims to achieve social equity through the distribution of government spending in a way that serves different segments of society (Matala-Banda, 2023:31). Its objectives are numerous and interconnected with other sciences and sectors. The most important of these include: Strategic Allocation of Resources, Operational Efficiency and Fiscal Discipline (Kristensen, 2019:2).

Functions of Public Financial Management

Public financial management plays an important role in the preparation and implementation of public plans and policies and contributes effectively to achieving governmental objectives. It represents the central link between financial resources, service delivery, and the achievement of goals. In order to perform this role, it must undertake a number of functions, as outlined: Budget Management, Accounting and Reporting, Cash Management, Public Revenue Management, Public Debt Management and Public Expenditure Management (Cheruiyot, 2018:1).

Public Expenditure and Financial Accountability Framework (PEFA)

Given the importance of public financial management in governments, as it is considered one of the primary tools used to achieve economic, social, and political objectives, countries around the world have devoted considerable attention to evaluating their financial administrations and working to develop and adopt mechanisms that help reform their structures and increase their resources. As a result, an international partnership composed of several countries and organizations emerged with the aim of establishing modern and unified practices that contribute to reforming public financial management and the course of its functions. Consequently, this partnership launched a unified financial framework for evaluating the various aspects of public financial management within a country. This framework became known as the Public Expenditure and Financial Accountability (PEFA) Framework, while its formal designation is the Public Financial Management Performance Measurement Framework (PEFA Secretariat, 2011:1–2). The framework aims to assist authorities responsible for financial affairs in identifying and implementing corrective measures to address weaknesses and strengthen areas of performance by providing a comprehensive report that offers an overall view of administrative performance. In addition, the framework analyzes the economic environment of the country and compares the extent to which established strategies align with public policies, as well as evaluating transparency and public accountability in financial matters (Hawke, 2016:43–44). This framework has been applied in many countries on numerous occasions and has recently become a standard methodology for financial governance assessments. To date, it has been implemented in more than 155 countries, producing over 889 completed assessment reports (www.pefa.org).

Auditing Public Financial Management

Public financial management is one of the most important sectors influencing the effectiveness of governments in achieving their objectives. Therefore, auditing this management represents a fundamental step in strengthening financial accountability practices and supporting necessary reforms in order to achieve the desired goals. Auditing public financial management is not limited to identifying deficiencies or resource wastage. It also aims to enhance confidence in the procedures and practices applied, improve governmental operational efficiency, identify opportunities for improvement, and focus on reducing financial risks. Due to the multiplicity of functions and tasks assigned to public financial management and the broad objectives it seeks to achieve, it is necessary to adopt an appropriate type of audit for each function and task performed. This implies combining the available types of auditing as a practical response to the diverse aspects of this administration (ADAR, N.D.:11). According to the International Organization of Supreme Audit Institutions (INTOSAI), the main types of auditing are: Performance Audit, Compliance Audit and Financial Audit Each type provides assurance regarding specific aspects (GUID/5250, 2019:6–7), as explained below:

Performance Audit

Performance auditing has become one of the most prominent topics in recent years at both regional and international levels. Many countries and their oversight bodies have devoted significant attention to this type of auditing due to the information and results it provides, which contribute effectively to supporting judgments related to performance and evaluating deviations (Padia & Vuuren, 2012:2). Performance auditing is diverse in nature and methodology and involves multiple interpretations and judgments. Its scope is not limited to a specific topic but extends to cover a wide range of subjects such as developmental and environmental issues (Gheorghiu, 2012:420). To ensure objectivity in its procedures, performance auditing requires reliable and measurable criteria or indicators that can be used to determine the ability of entities to manage their activities, utilize their resources, and achieve their objectives (Louwers et al., 2018:735).

Performance auditing is considered one of the broadest and most comprehensive types of auditing because it covers multiple aspects, including financial and administrative dimensions. Given the diversity of public financial management aspects and the wide range of functions it performs, performance auditing can serve as an appropriate tool for auditing the tasks of this administration and identifying the causes of deviations, thereby supporting financial accountability practices and corrective measures with the necessary information. To enhance the reliability of performance auditing processes and results, it must be supported by objective inputs based on solid foundations. This is precisely what the PEFA framework provides through its pillars, indicators, and dimensions that cover the scope of activities carried out by public financial management. Through this framework, a high degree of objectivity can be achieved in evaluation results, which can then serve as inputs and guidance for conducting performance audits.

Compliance Audit

Compliance auditing consists of processes aimed at providing assurance regarding the extent to which audited entities—particularly governmental ones—adhere to legal requirements and principles of discipline when performing their duties. Its procedures are designed to examine implemented activities, operations, and transactions, as well as disclosed information, in order to verify their compliance with legislation and the principles governing sound financial management. The purpose is to identify violations, determine their causes, and facilitate the adoption of measures capable of deterring them or reducing their impact (INTOSAI, 2022:14–15). This contributes to correcting the course of operations and providing feedback to administrative authorities responsible for establishing and legislating laws and policies (ISSAI-400, 2019:28).

It is evident that compliance auditing focuses on a central element represented by adherence to applicable laws and regulations. Since sound public financial management and positive financial outcomes are governed by fiscal discipline—which requires compliance with previously established rules, instructions, and timelines—compliance auditing of this administration constitutes an appropriate tool to enhance discipline and financial accountability by identifying legislative violations, their causes, and ways to prevent them.

Financial Audit

Financial auditing emerged to assist owners of economic entities in verifying the integrity of financial transactions and the extent to which they comply with their requirements. With economic development and the spread of globalization, financial auditing evolved into an independent third-party mechanism that acts as an assurance link between the management of economic entities and their owners by providing assurances regarding the financial position and operating results of the audited entity (ICPAR, 2020:14). Specifically, financial auditing refers to the objective examination and verification of financial statements, records, and accounting books of an economic entity in order to confirm that they are free from material errors and misstatements and that they comply with the applicable financial framework (B.A., 2023:15). Within government entities owned by the state, the scope of financial auditing extends beyond financial statements to include auditing government contracts, grants or aid received and provided, as well as international financial transactions (Arens et al., 2012:819).

Based on the above explanation of financial auditing, it becomes clear that the procedures of this type of external audit can be employed in examining the functions of public financial management, particularly those related to the results of the implementation of the state budget, the accuracy and completeness of maintained records and financial statements, and the imposed internal control systems. This can be guided by the pillars, indicators, and dimensions included in the PEFA framework and the results obtained from its implementation.

In the context of external auditing types, each type has its own stages and procedures that may be similar or different. Generally, they share the main phases of an audit engagement—planning, implementation, reporting, and follow-up—while differing in detailed procedures, reference standards, and required inputs. From this perspective, and in line with the broad scope of auditing public financial management, it is beneficial to employ a combination of external audit types simultaneously in order to cover both financial and non-financial aspects of the audited administration and produce diverse outputs and assurances that support comprehensive accountability and integrated reforms.

Conclusions

A. The Public Financial Management Assessment Framework issued by the Public Expenditure and Financial Accountability (PEFA) Secretariat is a dynamic document that can be adapted to the local context of any country.

B. The use of a combination of audit types enhances the scope, quality, and outcomes of audit activities in a way that corrects the financial course and strengthens financial accountability practices.

Recommendations

1. The Public Financial Management Assessment Framework should be adopted after adapting it to the local context and continuously updated in line with existing financial conditions, with consistent implementation.
2. Efforts should be made to develop documented methodologies explaining the mechanisms for applying two or more types of external auditing within a specific audit engagement.

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