Role of the External Auditor in Assessment of Value for Money - Essay Example

Public Finance Initiative February 8, Introduction (Brief Overview) The public finance initiative is a government prerogative. Under the prerogative, the government can deliver better services to the public. The government enters into contracts with private companies to improve the country’s public service facilities. The Public Finance Initiative help the government provide better facilities for its constituents. The initiative saves the government huge bank loan amounts. Private Finance Initiative’s effect on UK Government’s National Debt The Private Finance Initiative altered the financing aspects of public assets. Traditionally, the government borrowed money to construct hospitals, schools, prisons and other facilities, increasing the United Kingdom government’s national debt. The Private Finance Initiative grants private companies the right to design, finance, and manage the public facilities. The initiative favorably does not increase our nation’s national debt. In fact, the initiative did not form part of the total national debt calculation during 2005 and 2006 to comply with FRS 5 requirements. FRS 5 requires the Public Finance Initiatives are not shown as liabilities in the company’s financial statements (. Advantages/disadvantages of the Public Finance Initiatives There are advantages of the Public Finance Initiatives. The initiative contributes value for money to the government. Another advantage is the government’s not being required to borrow money or invest in the construction of public service facilities. The HM Treasury Department correctly affirms the Private Finance Initiative (PFI) was the best value for money procurement alternative, using private funds to implement government projects. One Liverpool City Council leader affirmed the Private Finance Initiative (PFI) provided the value for money source for the construction of the Royal Liverpool and Broadgreen University Hospitals. Professor Ron Hodges similarly agreed stating PFI may be the only available fund source with the government’s low budget constraints (Tyrie, 2011). There are disadvantages of the Public Finance Initiatives. One disadvantage is the increased risks. Another disadvantage is the possible mismanagement of the facilities, generating complaints from several sectors. In one situation, the NHS correctly selected two private firms’ bids for its 1999 - 2000 Public Finance Initiative projects. One of the bidders did not submit any bids. Consequently, the lone bidder increased its bid price by 33 percent. The absence of other bids persuaded the lone bidder to increase its bid price, monopolising the bid process (Corner, 2006). The Critical Evaluation and Appraisal of the Private Finance Initiative, Role of Auditors in value for money transactions The Private Finance Initiative (PFI) correctly represents the government’s partnership. The partnership is between the government sector and one or more private groups. The partnership allows the government to harness the excellent management services of the private companies (Hellowell, 2009). Likewise, the partnership permits the private companies to fund the government projects (Vining, 2008). The partnership allows the government to save on project funds, especially with the limited government capital budgets (Ghobadian, 2004). In most instances, the Public Finance Initiatives is a fixed contract. Under the contract, the private companies build public facilities. The facilities may include roads and bridges. The other facilities include healthcare facilities and government buildings. The private companies take control of the facilities for a number of years. The government may take control or ownership of the facilities after the contract expires or when unfavorable conditions occur, usually after 25 years. By offering private companies the right to design, maintain, and control the premises, the government harnesses the quality services and expertise of the private companies (Khadaroo, 2007). In 2003, the United Kingdom rightfully spearheaded a different version of its public –private partnership. The partnership was coined the title, Public Finance Initiative. The United Kingdom government entered in Public Finance Initiatives with an estimated 560 private companies. The total amount of the 2003 initiatives amounted to an estimated £36 billion (Corner, 2006). In general, the external auditor is required to express an opinion on the financial statements of all companies being audited, including being instructed to audit the financial statements of the Public Finance Initiative entities. The financial statement opinions may include unqualifiedly indicating the amounts and classifications presented in the financial reports are true and correct (National Audit Office, 2000), including the presence of fraudulent activities (Montiero, 2010). Further, the external auditor must review the entities’ internal control procedures, including the Private Finance Initiative (PFI) entities. After review, the auditor issues a report as to the current status of the internal control steps (Pollitt, 2005). The report must include whether the current procedures are currently able to eliminate or reduce the errors and fraudulent activities (NationalAuditOffice, 2009). In one audit, Pricewaterhouse Coopers, reported one Private Finance Initiative (PFI) activity used low quality materials in the construction of the school buildings. The users were dissatisfied, violating the value for money concept (Patrinos, 2009). The external auditor’s internal control audit of the Public Finance Initiative (PFI) focuses on plugging the loopholes. The loopholes entice the fraudulent individuals or parties to perform illegal acts. In the initiative, the private companies construct the buildings and other structures. Similarly, the private companies contribute to the design and building materials of the project. The private companies initially pay for the costs and expenses of the constructing facilities. Next, the private companies operate the constructed facilities (Corner, 2006). For example, the external auditor ensures the initiatives’ private parties deliver the requirement hospital beds or required prison cell requirements (Corner, 2006). Another role of the external auditor is to determine that corruption has been spotted or under investigation within the entities’ jurisdictions, especially within the realm of Private Finance Initiative objectives (OECD, 2010). Consequently, the auditors are required to ensure economy, efficiency and effectiveness prevails in the entities’ daily activities, including the Private Finance Initiative (PFI). The auditors help reduce theft or frauds (Drewry, 2005). Additionally, the Treasury Department correctly recommends the National Audit Office implement an external analysis of the value for money strategies as well as the public finance initiatives. The external auditor must audit the truthfulness or validity of each assumption with the initiatives. The external must report the findings to management for appropriate action. The auditors must use updated data in the audit process (GreatBritainParliament, 2012). The external auditors correctly work to constantly monitor and ensure reduction of the risks involved in each public finance initiative. Constant audits will discourage the line and staff employees of the parties from implementing their planned fraudulent activities. Likewise, the continued external audits will uncover any fraudulent activities early. The early audit detection stops the fraudulent amounts from ballooning to more significant amounts (Greve, 2005). In Canada, the Ontario Government correctly entered into its own Public Finance Initiatives. The initiatives included the construction of the highway concession. The Concession was the 99 year lease of Highway 407 with one private company. The private company is the Grupo Ferrovial /Cintra and the SNC Lavalin. The entire product cost was U.S. $ 1 billion (Levy, 2011). Australia rightfully entered into its one successful sets of Public Finance Initiatives. One of the South Australian leaders’ initiatives’ is the construction of the new prison center. Other Australian projects were managed by the South Australian government leaders’ Department of Treasury and Finance. The government offers tax incentives to private companies willing to join any Public Finance Initiative projects. Canada favorably benefitted from its Public Private Initiatives (Spoehr, 2009). In another Australian case, The 2000 Victoria Government was correctly forced to buy back the La Trobe Hospital from the private companies. The private companies entered into a Public Finance Initiative contract with the Australian Government. The losses generated from the initiative were significant enough to cast doubt on the viability or continuance of the private companies’ managing the constructed facilities. The facilities, La Trobe Hospital, was poorly constructed. The nurses complained that the facilities were not conducive enough to ensure quality healthcare services were delivered (Corner, 2006). In a third Australian case, the South Australian Government’s correctly funneled enough funds to rescue the contractor. The contractor’s funds dwindled to the point of possibly filing for bankruptcy. The facility is the Modbury Hospital. In some cases, the taxpayers must pay for the risks of the contractors’ unexpected dismal performance (Corner, 2006). In Europe, the Public Finance Initiative is a correct government prerogative. One initiative is a specific £100,000 investment. The investment focused on improving Europe’s information technology facilities. Another initiative focused on the construction of Europe’s largest tunnel’s railway system, The Channel Tunnel Rail Link. The link cost estimate was £4 billion. The Department of Tourism favors the use of the Public Finance Initiative (OECD, 2006). Public Finance Initiatives, Role of External Audit Agencies The external audit agencies correctly ensure the Private Finance Initiative (PFI) funds are well managed. One agency, the National Audit Office audits the bodies (especially the Private Finance Initiative (PFI) entities) of financial assets of our nation, United Kingdom. Specifically, the office determines whether the funds under the control of the Parliament. The office performs financial statement audits. In similar function, the office conducts audits of value for money transactions (Grimsey, 2004). In terms of financial audits, the National Audit Office correctly offers assurances over the proper allocation and use of government’s expenses, including the Private Finance Initiative (PFI) funds in compliance with value for money objectives. The office presents report indicating whether the amounts presented in the government’s financial reports or funds are true and fair. The office also reports on the entity’s finance-related transactions are properly spent or allocated. In one report, the National Audit Office stated the Guy’s and St Thomas’s Hospital’s Private Finance Initiative’s figures climbed from the prior £ 125 million to the higher £ 160 million. Likewise the same office mentioned the project’s completion date was extended by another three years (Hodge, 2005). The National Audit Office also conducts value for money audits. Under this audit process, the office determines whether the government funds are effectively used, especially the Private Finance Initiative (PFI). Next, the office and observes and reports whether the funds are economically used. Further, the office determines whether the entities’ funds are efficiently done (Dubben, 2009). The National Audit Office rightfully determines whether the Good Governance initiatives within the government bodies, including the Private Finance Initiative (PFI) bodies, are firmly in place. Good government is a shorter version of the value for money detailed report. The office presents the brief documents to each select government committed with distinct interest in Private Finance Initiative (Dubben, 2009). The National Audit Office observes and recommendations appropriate internal control mechanisms for the affected bodies, including the Private Finance Initiative (PFI) bodies. The mechanisms include monitoring whether the departmental balances are true and correct. Likewise, the office matches whether the quantitative fund distributions meet the bodies’ qualitative goals (Dubben, 2009). Specifically, the Northern Ireland Audit Office determines whether there are no irregularities in the Private Finance Initiative (PFI) fund transactions (2005). The irregularities include presence of graft and corruption incidents. The irregularities include the theft of government funds or assets, especially during the procurement process. The irregularities include exceeding the allocated budget or expense ceilings. Specifically, the National Audit Office audits more than 100 Private Finance Initiative Projects. Some audits indicate funds were not well managements. In other audits, the office observed they were excellently managements. The office presented more than 70 value for money reports to the Parliament (Parliament, 2010). Welsh Auditor General Another audit agency, the Wales Audit Office, is the Wales version of London’s National Audit Office. The agency is headed by the Auditor General for Wales. The general determines whether the bodies’ funds, including the Private Finance Initiative (PFI) funds, are properly managed. Proper management includes the efficient use of the allocated funds. Mr. Hodge and Mr. Greve mentioned the office implements the provisions of the Government of Wales Act of 2006 (2013). Conclusion The Public Finance Initiative is a favorable government alternative. The government favorably enters into contracts with private companies. The private companies design, construct, fund, and manage the public use facilities. Consequently, the government does not have to spend for the construction of much-needed hospitals, bridges, railways, highways, and other government facilities. Without postponing the construction of public facilities to a more opportune date, the initiative conserves the government’s scarce financial resources. Evidently, the regular external auditing of the Public Finance Initiative transactions minimizes the consequent risks, generating the required value for money. REFERENCES: Corner, D., 2006. The United Kingdom Private Finance Initiative: The Challenge of Allocating Risk. OECD Journal on Budgeting, 5(3). 37-55. Drewry, G., 2005, Contracts, Performance Measurements, and Accountability in the Public Sector. London: IOS Press. Dubben, N., 2009. Perceptions of Risk in the Private Finance Initiative. London: J. Wiley & Sons. Greve, C., Hodge, G. 2013. Rethinking Public Private Partnerships. London: Routledge Press. Ghobadian, A. 2004. The Future of Public- Private Partnership. London: Palgrave Macmillan. GreatBritainParliament., 2012. Private Finance Initiative . London: The Stationery Office. Grimsey, D., 2004. Public-Private Partnerships: The Worldwide Revolution. London: Edward Elgar Press. Hellowell, M., 2009. The Private Financing of NHS Hospitals. Economic Affairs , 29 (1), 13-19. Hodge, G., 2005. The Challenge of Public-Private Partnerships. London: Edward Elgar Press. Levy, S., 2011. Public -Private Partnerships: Case Studies. New York: ASCE Press. Montiero, R., 2010. Risk Management, International Handbook on Public- Private Partnerships. London: Edward Elgar Press. NationalAuditOffice., 2009. Private Finance Projects. London: The National Stationary Office. NorthernIrelandAuditOffice., 2005. The Private Finance Initiative. Ireland: The Stationary Office. OECD., 2010. Third Annual OECD Symposium on Public-Private Partnerships. London: OECD. Office, N. A., 2000. Examining the Value of Money of Deals under the Private Finance Initiative (PFI). London: The Stationary Office. Parliament., 2010. Private Finance Projects and Off-balance Sheet Debt. London: The Stationery Office Press. Patrinos, H., 2009. The Role and Impact of Public-Private Partnerships in Education. New York: World Bank Press. Pollitt, M., 2005. Learning from the U.K. Private Finance Initiative Experience. London: Edward Elgar. Spoehr, J., 2009. State of South Australa: From Crisis to Prosperity? Sydney Press: Wakefield Press. Tyrie, A., 2011. Private Finance Initiative . London: The Statonary Office. Vining, A., 2008. Public- Private Partnership in Canada. Canadian Public Administration , 51 (1), 9-44. Read More