The Psychology of Consultative Auditing

Written by Kymber Waltmunson, 

“Build your opponent a golden bridge to retreat across.”  This is the message of Sun Zsu in his 6^th century BC work, The Art of War. In auditing, the golden bridge we build crosses the river of resistance, resentment, and frustration and leads to positive organizational change: efficient, effective, economical, and equitable government.  In this article I revisit my first career as a psychotherapist to review techniques that may make us more successful auditors.  

When I use the term “consultative auditing” I am referring to the tone and approach to a fully independent audit, not to consulting activities. Consultative auditing is respectful, collegial, honest, and motivating.  The consultative audit approach can only enhance your independent, standard-compliant audit.

The most effective auditors do not simply report on conditions observed; they help to create conditions that result in organizational improvement without compromising audit principles.  Understanding some basic Transactional Analysis (TA) concepts and techniques can help us to do this more effectively.  TA is an approach to human beings and relationships initially developed by Eric Berne and expanded upon by others.

World View 

The way we look at the world is the foundation of TA theory.  In TA, the most effective way of operating is to assume the basic goodness and positive intent in others.  For example, when an audit customer fails to provide a key document the healthy way to interpret this is that it was overlooked rather than intentionally hidden.  TA theory states that we can choose how to interpret the world around us and by doing so can significantly impact the course of events.

Taking the previous example further, imagine the difference in response and impact on the tone of the audit when you say, “Thank you so much for gathering all of this data for us, I know that you are incredibly busy.  I noticed that ‘x document’ got missed. Can I swing by and pick it up later?”  Or the opposite impact of, “Local law requires you to provide all documents to the auditor.  If you don’t provide me with ‘x document’ within 24 hours I will begin the subpoena process.”

Taking the positive perspective does not eliminate professional skepticism.  These two world filters can co­exist. Skepticism requires that we ask enough questions, gather enough supporting data, and see the whole picture. It does not oblige us to label the audited group as devious liars intentionally misusing taxpayers’ hard earned dollars.

‘Atta Girl/Boy 

A second key idea of TA is “strokes.”  Strokes are all forms of interpersonal recognition and can be positive or negative.  Positive strokes can range from looking someone in the eye to saying, “good job!”  Negative strokes can range from being ignored when we say, “good morning” to being physically attacked.

We must acknowledge, as auditors, that all human beings, including our audit customers, need positive strokes to thrive. Many people believe that part of being a grown-up is being able to do your best with no recognition.

There has been media attention to the profile of the Generation X workforce recently identifying the need for positive reinforcement as a unique attribute of this new, young worker.  When examined honestly, however, the fact is that all human beings perform better and are more contented when there is an environment of positive strokes.

Positive recognition in the audit environment may come from auditors during meetings, conversations in the hall, or in audit reports. As we move through our audit work ensuring that there are more positive than negative strokes in your interactions will make audit work more successful.

The semantics and tone of audit reports, the balance of positive and negative strokes, is critical to creating an environment that is conducive to improvement.  There are endless ways to communicate a finding.  The auditor should work to choose language that motivates audit customers to act by recognizing strengths and positioning audit customers to leverage those strengths to address the recommendations we make.  The following chart compares “classic” audit language to motivating language:

Audit reports generate energy. We can help direct audit energy toward further developing positive practices in the organization or we can expect the audit customer to use audit energy to criticize and challenge the audit report.

Audit Drama 

One TA tool developed by Stephen Karpman, the drama triangle, represents a psychological dynamic that feeds into itself creating power plays, bad politics, and general chaos.  There are three points on the drama triangle: the Persecutor, the Rescuer, and the Victim.  Instead of playing out these dynamics, auditors can choose ways of communicating with audit customers that have positive results.

The Persecutor sees the world through an unconscious, “I can make you feel bad” filter.  The Rescuer has the opposite, “I can make you feel good” filter.  Finally, the Victim is powerless sufferer who believes that they can be made good or bad by one of the other positions.  Both auditors and audit customers can fit into any of these three categories and can switch roles quickly creating detrimental drama.

The most typical auditor approach is the Persecutor.  When an auditor chooses the Persecutor role unless the audit customer is a highly emotionally stable organization they will likely react in one of two ways:

1. The audit customer will react as Victim and sink into a “poor me” stance. This will stifle their
   motivation and ability to create positive change.
2. The audit customer will react from as Persecutor and attack the auditor. They might try to paint the auditor as incompetent or work to poke holes in any recommendations made instead of working to improve their processes.

The way to avoid drama in auditing is to choose not to rescue, persecute, or be the victim in communications with audit customers.  In addition, if the audit customer chooses a persecutor role to communicate with the auditor, auditors can decide not to follow the gut reaction to fight back.  To be effective, auditors must take a deep breath and take the high road every time.

Auditor as Parent 

Although few auditors would consider audit customers their children, parenting styles are a tool to evaluate audit approaches. Just as parents hope to raise smart and successful children, most auditors hope that their audit customers run smart and successful organizations.  In parenting literature core styles of parenting include authoritarian and authoritative.  Each approach elicits predictable behavior from children and will elicit the same predictable results with audit customers.

The authoritarian auditor has high expectations of conformity and compliance to rules and directions.
Authoritarian auditors expect much of their audit customers but do not explain the rules or provide tools to succeed. The auditor attempts to control an audit customer’s behavior and attitudes, stressing the importance of obedience to authority and discouraging discussion.  Auditors who use this method often deal with the auditee very firmly.

Authoritarian results: Those audited with this style tend to be less responsive, more distrustful and withholding, and have lower achievement.

The authoritative auditor has high expectations of compliance to rules and directions, an open dialogue about them, and a customer-centered approach characterized by positive affect.  Authoritative auditors encourage the audit customer to be independent and successful. The authoritative auditor operates on the belief that both the audit customer and the auditor have certain desires and that the needs of both are important.

Authoritative results:  These audit customers are self-reliant, become self-controlled, and are more independent and successful.

When does a consultative approach not make sense?

The choice of audit approach is not black or white; for each audit there is a point along the continuum of consultative methodology that makes sense.  Occasionally, acting in a consultative manner could make the auditor vulnerable and decrease the value of the audit.

For instance, one should always consider whether consultative activities will impair or appear to impair independence in the current project or in future audit work.  Consultative auditing requires clear, consistent boundaries.

There are times when an audit customer comes into the process very aggressive and withholding and your attempts to shift the tone are unsuccessful.  In this case, being too consultative could simply provide the audit customer ammunition to shoot down audit recommendations at the last minute and give them tools to render the audit ineffective politically or otherwise.

In closing…

When auditors act to support positive organizational change, back away from harsh pronouncements, and provide tools for success we leave one route available to our customers: the golden bridge.

Focus upon Infrastructure

At the end of the working day and the end of the tension-filled fiscal year every entity has one thing in common that they must recognize as a potential area for audit work-infrastructure.

In local government, infrastructure makes up the bones and connective tissue that supports all the other functions. Different departments make up the vital organs and auditors, well, that’s when the metaphor breaks down. I suppose auditors would be the hypothalamus, pituitary, or some other critical but unpopular regulatory organ.

The point is, infrastructure means many things to many people. 

It can mean the people who perform the critical activities for an organization. It can also mean the organizational structure and channels for communication within local government.  More often than naught it refers to the physical construction of buildings and roads that are paid for with bond monies as a part of capital improvement program.

We most often focus upon the financing of the infrastructure, specific components of the construction, or the procurement process because they are more manageable.  These things are also more immediately understandable for the public. Above all, the public wants infrastructure to work. And as we have seen in the case of the bridge collapse in Minneapolis, levee failures in New Orleans, and decaying public transit systems in Chicago, Boston, and New York, this critical infrastructure affects the lives of citizens directly and profoundly. It is also quite expensive to build and maintain.

For these reasons, we have chosen Infrastructure as the theme for this issue.  While not all of the articles fromthis issue focus on lessons learned from infrastructure audits we did have several submissions.  Our reliable columnist Gary Blackmer leads off the articles with his Opportunities for Improvement that focuses on infrastructure issues followed by lessons learned from King County and Oklahoma City audits of their public works departments.

Our March issue will highlight ALGA’s 20^th Anniversary which will be commemorated at the 2008 Annual Conference in Philadelphia.

Doug Whitworth
LGAQ Editor

Building Blocks for an Ethical Culture

Written by Nick Ciancio, Global Compliance,

Ethics hotlines, or whistleblower hotlines, are now prevalent within many organizations. While many assume that ethics hotlines were born as a result of prominent corporate scandals and the resulting Sarbanes-Oxley Act, the original compliance reporting hotline actually dates back to 1981. Global Compliance introduced the original reporting hotline and it was targeted to government defense contractors for disclosure of fraud and waste.

Section 301 of the Sarbanes-Oxley Act requires publicly traded corporations to implement procedures for confidential and anonymous submission of employee concerns regarding questionable accounting or auditing matters. However, organizations of all types, including those not mandated by the Sarbanes-Oxley Act such as private corporations, government entities, universities, and not-for-profit organizations, have also begun to implement hotline reporting systems. These hotline reporting systems are being put in place to protect the organizations and build public confidence along with the confidence of employees, customers, and stakeholders.

In reality, reporting hotlines are a very effective means of uncovering occupational fraud. The 2006 Association of Certified Fraud Examiners (ACFE) Report to the Nation shows that 34.2% of occupational fraud schemes were discovered by tips, the most common method of discovery. And, of those tips, nearly two out of three tips came from employees. Further, in the cases reviewed in the ACFE Report, organizations that had anonymous fraud hotlines suffered a median loss of $100,000 in fraud schemes, whereas organizations without hotlines suffered a median loss of $200,000.¹ This data, therefore, supports the use of hotlines as a fraud detection tool.

However, while hotlines serve as an important source of information intake, hotlines are just one key element within an effective ethics and compliance program. While it’s one thing to provide a vehicle for information intake, it’s equally important to educate employees on an organization’s core values, relevant industry regulations, key legislation, and organizational processes and procedures, along with expected behaviors. This said, a thorough Code of Conduct, employee training, and ongoing employee communications each become a critical part of building an ethical business culture. These elements integrated with a hotline and web reporting system enable an organization to protect itself from financial, legal, and reputational harm. Lastly, with all of the key elements in place, it then becomes important to regularly measure and validate employee comprehension, as well as overall perception of the work environment and culture.

Recent high visibility scandals in a multitude of industries and sectors have made occupational fraud top of mind. Today, we’re seeing organizations including ethical risk in their overall risk assessment efforts, and high-level ethics and compliance functional positions directly reporting to the CEO and the Board of Directors established within organizations. No doubt, occupational fraud is not a new trend in today’s business world, but rather has been prevalent for years. However, the enactment of the Sarbanes-Oxley Act of 2002 followed by amendments to the Organizational Sentencing Guidelines in November of 2004 has raised the stakes for organizations of all types – public and private corporations, government entities and not-for- profit organizations. Accountability at all hierarchical levels is now mandated and mindsets are evolving. Perhaps in near time we’ll see businesses fully recognizing that ethical business is good business and the only responsible approach with respect to employees, customers, and stakeholders.

¹ 2006 ACFE Report to the Nation on Occupational Fraud & Abuse

The Nexters

Written by Brandon Haynes, City of Atlanta, 

Last August I posed a question to the list serve asking young auditors (mid 30’s or younger) and those new to the profession about their feelings coming into the profession. Although the question I asked generated many concerns about the validity of the question, the question itself did not spawn many responses. Most people who sent responses directly to me thought the concept was interesting and asked me to share what I found. So after six months and a different audit shop later, here is my essay. I hope it can foster thought about the future of our profession.

Introduction

Whether it is because of age, years of experience or other factors, retirement has started to siphon experienced auditors from our profession. Through their eventual departure, vacancies will open and be filled by a new generation of employees. As a profession, are we prepared for this? How can we make the transition easier? The next few paragraphs will describe the new generation entering the workforce, the “Nexters,” as well as discuss how a few Nexters feel about performance auditing. Although this may speak more about the younger generation entering performance auditing, I hope the central premise of my message can be embraced by the profession as a whole, since the cultural shock of entering the profession of performance auditing for the first time can be jolting at any age. Knowing and understanding this new workforce may prove beneficial in recruiting and retaining good employees in the profession.

RISE OF THE NEXTERS

From 1977-2000, the Nexter generation was born, raised, and matriculated into the workforce.

Being the children of the Baby Boomers, and younger siblings to Generation Xers, some circles refer to us as the Baby Boom Echo, Millennials or being a part of the Baby Boomlet. You may have started to see some now if you have employees who are around 30 and younger. The Nexters have grown up participating in so many different types of extra-curricular activities (athletics, drama, clubs, jobs) that time management and multitasking have become second nature. They came out of the womb pointing and clicking a mouse and playing video games, so technology is not a luxury to them, but a necessity. Living through the end of the boom of the 80’s and early 90’s into the down-sizing of the 90’s and the world of unrest in the 00’s, Nexters are expected to work well with “Seniors” (born 1922-1945), who made it through the Depression era. Nexters have a hopeful optimism that they can foster change and make life better. They are considered a “self confident group, and sometimes even cocky,” but they do “need structure and direction in the work place.” Nexters are expected to be fiercely loyal to managers that have helped train and develop their abilities, much like their coaches did. Though they believe in hard work, work will not be the only priority as Nexters want to strike a balance between work and family life.

Nexters’ Thoughts on Performance Auditing

The Nexters who responded to my email displayed some characteristics, which I described in this article. Nexters enjoy performance auditing because of its versatility. One person said they enjoyed the variety in skills needed for different projects; that it kept things from getting boring. Performance auditing actually lets us use the array of skills we have spent years and money developing in college, such as critical reading and thinking, researching, and using numerous computer software packages. Some are pleased that performance auditing has propelled them closer to those who create and implement policy. The profession also lends itself to our idealistic nature that we can help change the world.

However, some Nexters mentioned that lack of training and development is a problem within the profession. They are not speaking of the 80 hours of biannual training to meet Yellow book standards, but the initial training can be crucial to develop and retain new auditors. Fellow Nexters feel there is no training on how to be an auditor. There is a sink or swim mentality within the profession that does not necessarily work well with all Nexters. One person said they were “given the keys to an office and told to ‘have at it’.”

When I first started, I was oriented to the office and the city, and was told to read the Yellow Book sections on performance auditing, but there was little connecting that to what we actually did day to day. I reviewed workpapers and past audits, but I still did not grasp auditing. There was nothing to tell me what a good workpaper looked like, or how to write effective planning summaries. Fortunately, my first supervisor scheduled weekly meetings with me to provide feedback on my work, including workpapers, interviews and other writings, and helped me with some of the terminology we use. At the time I did not fully understand everything he told me, but as I became more experienced, I started understanding the concepts and how they related to the work we do. I understood the processes and how their sequence fit within the context of the audit and standards. This type of feedback may not be the norm in every audit shop, but maybe it should be. Although every shop varies in its approach, one person suggested creating a guide that would direct new auditors through the entire audit process from an engagement letter to the final report. In the short term, that would provide direction for people new to the profession. Even though some catch on faster than others, there’s no need for potentially good auditors to get frustrated and leave the profession because of an initial lack of direction.

Another concern from Nexters was the pace of auditing. Some believe the process to be a bit slow. Nexters understand that auditing by nature is a slow and methodical process, and that slow responses from auditees can account for some of the lethargy. With that said, it is doubly important that we stay on task and not add length to an already lengthy process. One Nexter believes that how knowledgeable and confident an auditor is will determine how fast the audit is performed. While I believe this is true, it has been my experience that we increase the time of an audit, which at times slows the pace, by adding work steps after the planning and, sometimes, fieldwork reviews. As auditors we want to know every possible detail possible, even when in some instances its unnecessary information. We must find a balance between precision and timeliness. Quicker, more focused audits can still be as accurate as longer, broader audits. As one auditor said, “Taking 9-12 months to do an audit is a luxury that we probably can’t afford.”

Thoughts about Nexters

Although we have the necessary skills to be successful in the profession, Nexters can be overconfident and fail to listen to voices of experience trying to guide us over the pitfalls of youth and inexperience. The experienced auditors that responded said they enjoy Nexters’ “fresh perspectives”, “quicker pace” and “comfort with technology.” They like how we were not “burnt out or cynical” just yet. However, some didn’t like this generation’s sometime “what’s in it for me” or “know it all” attitude. Nexters have grown up in an information age where everything we’ve wanted to know has been at the tip of our finger. Nevertheless, we still have to understand that, although we sometimes think we know all that we need to know, we still should look to our predecessors as guides teaching us how to use the knowledge we possess.

Looking to the Future

So, that was just a brief snapshot of the concerns of the generation that will be entering the workforce in the coming years. As we move farther away from Generation X, these traits will most likely be accentuated in your new hires. Do not take this as the end all be all of my generation, as they will come in all shapes and sizes. I wrote this to say that the world is a changing place and performance auditing has to change with it. A little more direction may be needed by the experienced auditors to help not only the Nexters, but to anyone new to the profession. And as Nexters, we will need to show a little more patience and professionalism as our chosen craft grows not necessarily at the rate we want it to, but at its own pace.

Combining the lessons of the past with new technology and a healthy optimism for the future will keep our profession moving in the right direction.

Sources:
The New Workforce by Harriet Hankin

Mixing and Managing Four Generations of Employees by Greg Hammill
www.fdu.edu /newspubs/magazine/05ws/generations.htm

Managing a Multi-Generational Workforce

(Training material provided to supervisors in the City of Kansas City)

Born to Audit

Written by Gary Blackmer,

I intend to write about the challenges and strategies of performance auditing, to provoke debate, and help us all be better professionals.

I don’t presume to fill Mark Funkhouser’s shoes, which I’m sure are much larger than my size 10s, but I’d like to share some of my observations as an auditor here in the beautiful Pacific Northwest. I intend to write about the challenges and strategies of performance auditing, to provoke debate, and help us all be better professionals. I’ll try to keep the tone light and my black humor lightened to the color of Portland’s winter sky.

My perspective reflects the work environments I’ve been auditing since 1985, which differ from yours. You may find the ideas and strategies in future columns compelling, but I would caution you not to attempt them yourself without considerable forethought and preparation (this fine print is included to satisfy ALGA’s team of lawyers).

My background is intertwined with the institution of elected auditors in the Portland area. I worked as a staff auditor to the elected Portland auditor for six years, campaigned and was elected the Multnomah County Auditor (the metropolitan county), and later returned as the elected Portland Auditor. We also have an elected regional government auditor (Metro) and neighboring Washington County has an elected auditor.

The City and County auditors were part of those governments’ charters, which were drafted in the American populist era around 1910. Oregon was engulfed in populism – the first state to directly elect its congressional representatives; created the initiative, referendum, and recall powers; and an early grantor of the vote to women to name a few. These were all accountability measures, though professionalism in government was only beginning with the introduction of features such as civil service.

Auditors were the elected Council clerk, which included other duties such as accounting. In the 1960s, with the invention of the computer and financial software, these offices began shedding various duties and concentrating on auditing. I read about the political battle waged by Multnomah County Auditor Jake O’Donnell to possess the new computer due to arrive. He lost the battle for the computer and about 60 of his accounting staff were transferred to the new Finance Office. He was left with a half-dozen employees, still called auditors, who had little purpose or direction. I joke that the Portland Auditor’s Office had computers in the 1930s, because I saw them in the budget. Computer I, II, and III were job classifications. Good math skills were a basic requirement back then, in order to verify the payments.

The elected auditors in Washington County and Metro arrived in the late 70s and 80s, based upon the performance auditing models of Portland and Multnomah County.

All these offices now have certification requirements – Certified Public Accountant or Certified Internal Auditor – for any candidates. The credential fences off the offices from political opportunists and ensures that a professional leader is selected. In addition, the forms of government in Portland and Multnomah County make it difficult to have an appointed auditor.

I never conceived of being an elected official because politics seemed to be the antithesis of an analyst. Jewel Lansing, prior Multnomah County Auditor and Portland Auditor, hired me in 1985, for my analytical skills and practical operational experience, I believe. I also recall Jerry Silva was on the interview panel because Dick Tracy promised him dinner and drinks if he came up to help out, though that may be just stereotyping. One condition Jewel placed on me before offering the position was that I seek a professional certification, because I needed better credentials as a basis to “tell Bureau Directors how to do their job.” I managed to become a Certified Internal Auditor, back in the old days when there were essay questions and only 20% of the candidates succeeded in getting certified. And I had to walk three miles through the snow to take it. I made that last one up to uphold the geezer tradition.

Five years later Jewel approached me about running for the County Auditor seat. I dismissed her notion immediately. But I did start looking at the work being done by the incumbent, who won the office because there was no certification requirement at the time and his father was the former Mayor of Portland. I knew I could do better than someone with no audit experience; there were no other opponents, so I ran and got elected (it was much more complicated but we’ll move on for now).

Performance auditing fits my abilities and interests like a glove. I get great satisfaction from practical problem-solving and serving the public. The variety of assignments means new challenges and a bird’s eye view of government operations. Police patrol scheduling, fire workload and performance, parking garage management, street paving operations, and financial condition reporting taught me a great deal while I was a staff auditor in Portland.

As the County Auditor, I could focus on the larger issues and develop a strategy in audit selection. I enjoyed the broad power to consider the quality of management in departments and time the audit schedule to have the most positive impact. I enjoyed the enthusiasm, curiosity, and creativity of the auditors. And I still enjoy the shock among students and citizens when I explain my job and they realize how interesting and challenging performance auditing can be.

I discovered performance auditing by accident, because my agency was being audited. I had been working in the Multnomah County Sheriff’s Office planning and research unit. In the months we weren’t preparing the budget I was analyzing patrol deployment practices to see how we matched up with the workload. I had filled entire shelves with binders of charts and tables of data by hour of day, day of week, geographically, and about every other conceivable way. Imagine my excitement when an auditor showed up and began asking me how we tracked patrol deployment!

I realized that this auditor got to analyze the same questions I did, but in a wide variety of fields, not just law enforcement. That County auditor was Doug Norman who later joined the Portland audit staff and shared his office with me in my rookie years after I was hired.

Multnomah County had started conducting performance audits in the late seventies. This came about because Jewel Lansing volunteered to drive Lennis Knighton from the airport to his speaking engagement. She learned about performance auditing and made it a part of her campaign platform when she ran for the office. She got rid of the Jake O’Donnell staff and hired new auditors with a skill set that encompassed much more than accounting, and started issuing audits that brought attention, and change, to Multnomah County operations.

Jewel Lansing became very popular and ran for State Treasurer but was defeated. She later ran for City Auditor and introduced performance auditing there as well. I have not described the challenges she faced in these two large accomplishments or her other contributions to performance auditing, which is a story in itself. In the Multnomah County Auditor’s Library, we had the complete collection of Yellow Books, from the very first in 1972, which really should have been called the Yellow Pamphlet.

That was the year I graduated from college. Northern Illinois University has a very well-respected school of accounting. I am not boasting, because my degree is in philosophy. I liked philosophy because I saw it as analysis and problem-solving, though I later learned it had limited practical applications. I had been majoring in pre-optometry, heavy in math and science, but soon realized it wasn’t the career I really wanted, but I needed to graduate in four years in some major.

Looking for some direction, I took a vocational aptitude test and it said I should either be a computer programmer or a journalist. I had never used a computer in 1969 and I did write for the college newspaper, but hated producing stories about boring things. When I ran across the results of the aptitude test 25 years later I realized how close I had come to a combination of those two professions. I had found a way to use computers to tell important stories to the public. Besides philosophy, I had also done post-graduate work in Systems Science, which taught me a toolbox of analysis methods, including Revised Polish Notation on my Hewlett-Packard 25 programmable calculator.

Now, with the development of the performance auditor profession, I imagine more students are getting directed earlier to the field it took me 15 years to find. I have college friends who still shake their heads at the arc of my career. I had no plan, but it was still a natural progression. Even I am surprised at the sequence, because I remember a ride home from college, with my folks sitting in the front seat. My Dad was going on about some detail at work and I could not reconcile it with the massive demonstrations against the Vietnam War and the obvious moral bankruptcy of President Nixon. I remember thinking to myself, there is no way, no how, that I could ever do my Dad’s kind of work.

Though I also remember sometimes on a Saturday morning, he would take me to work with him and he would show me the machinery he worked with. He would let me type my name on the keyboard, which would produce a card with holes in it, just like the stacks of others he ran through an immense sorting machine that printed out lines on wide paper. He was the controller in a corporation, and by gosh, I fell a little farther from that tree.

And I still remember an old schoolhouse saying he taught me:

That’s the course of my professional life to its headwaters, with some of what I witnessed and learned about the field of auditing as it transformed from a clerk to an accountability professional.

Summertime Rolls

This summer’s blockbuster for many of us will not be Hollywood’s finest but witnessing and/or participating in budget discussions for the coming fiscal year.  Our days may be filled with anticipation as we discover whether our audit shops will expand or contract, will be assigned interesting or boring work, and whether or not our auditees in other departments will be funded for their own projects.

We wait with bated breath for news, even rumors, about presentations from our elected officials.  Who is meeting with whom?  Did they really say something cutting funding in one place to give to another? How will the citizens react to the budget presentations?  What do they really care about?  As this drama unfolds, we may all find ourselves at least marginally affected, even if other departments are impacted more than our own.

For some of us, another highlight of summer of 2007 might be the ALGA Annual Convention.  It will give us the opportunity to meet old and new members, discuss practical tips to beat the audit performance blues, and share knowledge gained by experience in serving our organizations.

I would also like to take time to announce the addition of Brandon Haynes as the assistant editor for the Local Government Auditing Quarterly.  Brandon worked for Mayor Mark Funkhouser when he was the City Auditor of Kansas City then moved to Atlanta where he works closely with other ALGA activists.  I’m glad to add someone with the depth of experience, education, and energy that Brandon brings to the Communications team. Brandon will help usher in some changes to the LGAQ for next year including the construction of template to help standardize, and hopefully improve, the look and feel of our publication.

We will also be rolling out some themes for every issue to help you all as writers.

For example, the theme for the September Quarterly will be, “The Art and Science of Auditing.” I hope that you all take this broadly written prompt and use it to your advantage in generating articles.  Future issues may have themes such as “Auditing and Technology,” “Back to the Basics of Auditing,” or “The Role of Auditing in Local Governance.”

We look forward to seeing new faces, rekindling old relationships, and learning new skills in Memphis.  But if you aren’t able to make it to the conference, we hope that your endless summer is still filled with excitement from the sights and sounds of local government auditing.

A View From the Sidelines

Sometimes it’s helpful and often reinforcing to move to the side and view the context and outcomes of the endeavors we have undertaken.

As professionals in the operations and conduct of audit offices in government we are charged with significant responsibility. In almost every instance, government obtains its resources by involuntary payment from its citizens. Citizens seldom get to vote on payment of taxes, in many cases don’t get to express their concern regarding how the resources are used, and are expected to ante up the funds on demand.

Government therefore has a sacred responsibility to use the funds wisely, efficiently and effectively. Government also has the responsibility to protect the assets it obtains from the citizenry from losses of any nature.

The government audit function is part and parcel of these two responsibilities: It operates between the two conflicting forces of identifying inefficiency, lack of effectiveness, fraud, abuse and illegal acts, and the pressure from special interests, government management and elected officials to do in a manner that agency integrity remains unblemished, management and elected officials are not embarrassed and that public confidence in its governments remains high.

In this continuing push and pull many government auditors have lost their job or were not re-appointed upon completion of their term for simply attempting to accomplish the mission of their office. And, on the other side, employees, managers, and some elected officials have been turned out of office, lost their pensions, and in some cases been prosecuted and punished for the manner in which they conducted the peoples business.

Are these prices too high to pay? What is the context in which professionals in our profession should view this continuing drama? And why discuss it at all?

First a view of the playing field for the oversight coverage provided by the profession. The 2005 federal budget identified $2.037 billion (two trillion thirty seven billion) in expected revenues and $2,397 billion in outlays for operating a vast spectrum of public service operations. Add to that the hundreds of billions of dollars obtained and spent by state and local governments for an equally vast network of government funded programs and the result is a gold mine of opportunity for mismanagement, inefficiency, fraud, corruption and illegal acts – and don’t forget ineffective delivery of services to the public.

In it\’s 2006 Report to the Nation on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners estimates that U.S. organizations lose five percent of their annual revenues to fraud. Applied to the federal government’s 2005 expenditure budget, this amounts to $105.8 billion in fraud losses alone. And that figure does not include mismanagement of funds, costs of programs that are no long necessary, costs of programs that result in ineffective service, nor does it include funds expended in the course of abusive use of power. Again, applying the CFE’s five percent estimate to state government and local municipalities’ expenditures, the estimated loss from fraud alone is staggering. When waste of governmental resources is factored in, the result is an enormous loss of taxpayer provided funds.

Fraud and mismanagement of funds is very difficult to identify. The Association of Certified Fraud Examiners (CFE) estimates that on average 18 months elapses from the time the fraud was initiated until it was identified. Similarly, mismanagement and misuse of funds is equally difficult to identify. Typically internal fraud occurs due to weak internal accounting and management controls, over-riding internal controls by management and/or inattention to the controls by management. Ineffective use of resources can be caused by many factors, among them are political directives spawned by special interest groups, promotion from a cadre of persons trained in a professional specialty, but not in management, and leadership resistant to change. The combination of huge amounts of funding available for expenditure in the public sector and the potential of weak internal controls and lax management provides a significant lure to persons interested in making illegal gains.

A final factor that fits into this mix is the lack of sufficient oversight. Most governments now undergo an annual independent audit of their financial statements by accounting firms external to the government. Typically the best that comes from such and audit is a declaration of reasonable assurance that the financial statements fairly represent the business activities of the audited agency accompanied by a management letter. And while external auditors have a responsibility for being alert for fraud, that function is not their primary mission. Moreover, if fraud is discovered and reported, the result could eventually lead to loss of future contracts for the engagement – for the same reasons that internal government oversight personnel are released simply for performing the job they were hired to do.

Also, many organizations employ internal auditors to check financial transactions and perform other financial oversight responsibilities. And while they should report to an audit committee, more often than not, they report to the finance director or the chief operating officer of the organization – an organizational placement that provides at a minimum, the appearance of conflict of interest. At worst it becomes an actual conflict of interest that results in pressure to not report financial details accurately.

Finally many government organizations, especially at the federal and state level employ offices of inspector general to conduct a variety of oversight functions that can include: financial audit, performance audit, fraud investigation, inspections and program evaluations. On paper, this oversight effort is laudable but given the lure of huge amounts of money expended by government and the potential for weak controls/management, the challenge is monumental.

The truth of the matter is that government oversight operations are generally not provided with the resources necessary given the vulnerability and relative risk contained in the entity in which they operate. If an oversight body were to lay out all the high risk, vulnerable functions inherent in the organization for which it has oversight responsibility and estimate the time necessary to examine by audit or pro-actively investigate for fraud deterrence given existing resources, the time it would take to complete work in all areas would stretch out over decades. Most governmental entities allocate less than half a percent of their annual budget to the oversight function. This situation does not provide a reasonable comfort level for protecting the assets entrusted to the entity by the public.

So, looking at the big picture from the sidelines – the enormity of the responsibility, the tendency for nonacceptance by the entity leadership and the lack of suitable resources points to the most difficult of challenges. Each of the audit organizations in ALGA face that reality. And each such member is at the job every day, maintaining the integrity of the office, rooting out fraud, providing the entity with information that will improve efficiency and effectiveness and attempting to stay on top of the potentially foul things that can occur in their organization. There is every reason to be pleased and proud of the work so conducted and at the end of the day or the day you leave office, to be proud of what has been accomplished and what has been contributed to the citizens of your community. While there is no way that oversight can find all the instances that exist that waste and steal public resources oversight does make a difference.

There will always be a full day of challenges ahead – use those challenges as an opportunity and continue to uphold the righteousness of the oversight function.