Mission Statement
To create efficient and cost effective governmental audits by privatizing the examination of first class cities and counties through a well-regulated peer review process administered by the State Auditor’s Office.
Definitions
Office. “Office” means the State Auditor’s Office/Office of the State Auditor.
Elected Official(s). “Elected Official(s)” includes all past and present State Auditors. It does not include any other elected officials.
Client(s). “Clients” means all First Class Cities and all counties, except Hennepin County, within the State of Minnesota.
First Class Cities. “First Class Cities” means Minneapolis, St. Paul, and Duluth.
Mandate. “Mandate” means the unfunded state statute, which requires all clients to be audited by the Office. This unfunded mandate does not forbid the Office from releasing clients from the mandate.
Employees. “Employees” mean all current employees of the Office.
The Plan
Currently, the State Auditor’s Office has an unfunded mandate to audit all first class cities and all counties. Twenty-eight counties, including Hennepin County, were released from this unfunded auditing mandate for a three-year period. This means that the Office of the State Auditor allowed these 28 counties to privatize the auditing of their books for audit years 2006 to 2008. These counties have been released again for audit years 2009 to 2011. This free-market approach to auditing saves these counties serious money through competitive bidding by private CPA firms. My Plan is to release the remaining 59 counties and our 3 first class cities from the unfunded mandate under the condition that audits of these municipalities go through a well-regulated peer review process administered by the State Auditor’s Office.
Problems with the State Auditor’s Office
Each elected official has faced the same problem and none have been willing to address the problem, and the problem is this: Some county audits and Management Letters are issued very late, and the costs of the audits have been increasing exponentially. Some are as late as 16 months. Those audits are useless for the budgeting cycle of the clients, Truth-in-Taxation hearings, and bond issues if the client decides to issue new debt. Furthermore, any recommendations in the Management Letter cannot be implemented until over a year after the comment was uncovered. A second problem the Office has is the federal Single Audit deadline. Currently, all Single Audits have to be completed by September 30. Many of the audits performed by the Office are Single Audits and do not meet this deadline. The federal government is considering moving this deadline to June 30 to improve timelines. Another problem the Office has is the appearance of partisan politics. The audits and Management Letters should be viewed as non-partisan. Finally, there are no qualifications for State Auditor. The State Auditor does not have to be a CPA, and there has never been an elected official that has been a CPA.
Causes of the Problems
Even though some of the delayed audit reports may be client specific, the main cause of the late issuance of audit reports and Management Letters by the Office is staffing. All clients have a calendar year ending December 31. If the Office increased their staff so that all audits were issued by June 30, then there would be no work for the employees for the second half of the year. Therefore, the Office has to spread out the audits so that the employees have work for the whole year. By tapping into CPA firms, the Office would have access to a large reserve of highly skilled employees who can be flexed from calendar year end December 31 to fiscal year end June 30 for school districts, which are not covered under the mandate. CPA firms can flex employees for other off-season assignments, too. State statute does not allow the Office to transfer costs from one client to another. The time spent auditing a client has to be billed to that client. Private CPA firms do not have this problem.
The second cause of delayed audit reports is preferential treatment for large clients that apply for the Government Finance Officers Association Certificate. The GFOA requires all GFOA Certificate audits to be issued by June 30. Member clients of the GFOA can apply for an extension; however, each extension has to be accompanied with an explanation, and an explanation that the auditors could not get their job done timely would probably not be accepted. Therefore, the Office front ends the audit cycle with GFOA members at the expense of small counties. This is a political decision. All past elected officials have not wanted to upset large clients because large clients have many constituents and legislators. By front end loading the GFOA clients, the elected officials have been able to minimize the pressure on the mandate. With regards to the extension, the GFOA also has a limit on the number of times a GFOA member can apply for an extension.
The third cause of delayed audit reports is client specific. The mandate enables clients not to address the accounting problems within their accounting departments. If a client has a weak accounting department, the Office would provide the accounting services necessary to issue an unqualified opinion. For some clients, this makes financial sense. In the past, elected officials have not wanted to report this issue to the governing body in order to protect the mandate. An unregulated CPA firm may do the same thing so that they would get a repeated client.
A fourth cause of delayed audit reports is over auditing by the Office. This is caused because there is no outside market pressure competing against the mandate and forcing efficiency. Governmental audits are not like the audits of private companies. Governmental entities have a much higher level of fiduciary responsibility because of their taxing authority. Furthermore, governmental entities do not have the going concern issue that private companies have. If a governmental entity gets into financial trouble, they can raise taxes. If a private company gets into financial trouble, they file for liquidation. There is little risk to a CPA firm who audits an entity that does not have a going concern issue. When Enron got in trouble, their auditors, Arthur Anderson, had to dissolve. This risk does not exist with governmental entities and their auditors.
The fifth cause of delayed audit reports is petition audits. If a group of citizens petition for a special audit by the Office, the petition audit jumps in front of non-GFOA audits. Elected officials do this for political reasons.
The primary cause of escalating audit costs is the combination of the mandate and the audit program generator the Office uses. Audit program generators have an endless number of audit procedures, and when you combine an endless number of audit procedures with a mandate, you have out of control costs and over auditing. The following statement may sound like a contradiction, but where there is over auditing, there is under auditing. Only free market pressure can control over auditing.
The second cause of the escalating audit costs is unconscious incompetence of some clients. This is the stage where you don’t know that you don’t know. The mandate enabled this problem.
Details of the Plan
Certificate Program
Clients will be allowed to solicit a Request for Proposal in which private CPA firms will be allowed to bid on released client audits so long as both agree to participate in a peer review Certificate Program administered by the State Auditor’s Office. Initial Certificates to bid on released clients will be granted to CPA firms that can show that they have expertise to audit released clients. CPA firms who hire current employees with past experience will be granted an initial Certificate to bid on released clients, although this will not be a requirement to obtain an initial Certificate. Hiring current employees of the Office will be strongly encouraged. If a client’s audit does not pass peer review, the Certificate granted to the CPA firm will be pulled, and the CPA firm will not be allowed to bid on other released clients. If a client’s audit does not pass peer review, the Office will audit the client to the necessary level of assurance to protect taxpayers. The Certificate Program will be funded by a 5% surcharge on the cost of the audit. Initially, employees of the Office will staff the Certificate Program. Eventually, through attrition, the Certificate Program will become a fellowship program made up of 50% employees of the State Auditor’s Office who are CPAs and 50% private CPAs. A progress report of the Certificate Program will be submitted for recommendations to the Legislative Audit Commission, which is made up of 50% Republicans and 50% Democrats. If the Legislative Audit Commission considers the Certificate Program unnecessary, the Certificate Program will be dismantled. Finally, no client will be released without a formal request from the governing body, and all participants of the Certificate Program must agree to work for an issue date no later than June 30. A thorough explanation must be reported to the Office if the report and management letter does not meet the June 30 deadline. Failure to meet a June 30 issue date without an adequate explanation determined by the Office would cause expulsion from the Certificate Program. It is strongly encouraged that the participants try to achieve an issue date no later than April 30. Finally, the State Auditor’s Office will not determine the audit planning and procedures used by the CPA firms. Auditing Standards and market forces will determine that. The peer review program will set goals and will determine if clients and CPA firms are acting in the best interest of the taxpayer.
The State Auditor's Office requires all cities to report their audited financial statements and management letters to the State Auditor’s Office by June 30. The State Auditor's Office cannot meet its own requirements.
Transition Program
The plan will require a transition period for both clients and current employees. This transition should not take more than three years. Clients who have strong accounting departments will be the first audits released. Clients with weak accounting departments may never be released. This will create an incentive for clients to improve their accounting departments. For clients with weak accounting departments, hiring current employees of the Office will be strongly encouraged. Current employees will also be able to participate in an Internship Program with private CPA firms. This will help current employees transition into the private sector and will allow CPA firms to hire the necessary experience to obtain an initial Certificate to bid on released clients. During the transition period, current employees will also be encouraged to establish their own CPA firms by granting them an initial Certificate to bid on released clients. The Legislative Auditor’s Office should be encouraged to participate in this transition program by giving preferential treatment to current employees of the State Auditor’s Office in their hiring process. Finally, more senior auditors who are close to retirement will be retained to run the peer review program. These auditors will also participate in petition audits, special fraud investigation, and an audit of clients if a CPA firm does not pass peer review.
Addendum
Funding for the Office
According to the Minnesota Management and Budget, 80% of the State Auditor’s Office’s budget is “offset” by revenues from conducting audits. Most of those charges come from the audit division. Twenty percent of the Office is funded by an appropriation, which includes the Government Information Division (GID). In the past, elected officials have been most interested in GID because the information from GID can be used to advance political careers.
Genesis of the Plan
At the close of the Dayton administration in 1994, I considered running for the Office. In my consideration, I did an in-depth study and analysis of his administration. At that time, I will admit that I did this study with a vindictive intention towards the Dayton administration. I surprised myself when I prepared the conclusion with honesty. The conclusion of that study was the genesis of the Plan. At that time, I did not know that the Plan was incomplete. The Plan is still a living document, and public comments to the Plan are greatly appreciated. I shared the Plan with all subsequent elected State Auditors. It went nowhere. During each subsequent administration, the Plan continued to evolve to include the Certificate Program and the Transition Program. The Transition Program was included to help clients prepare for release. Not all clients will be ready for release. The first time I met the current State Auditor, I shared my concerns and discussed the Plan. It went nowhere.
So, why has the Plan been ignored by all elected officials? I can think of only two reasons. The first is political and the second is financial. The main political reason is name recognition. The more reports issued with an elected official’s name, the more name recognition. Another political reason is government unions. Many elected officials are pressured by government unions to protect government jobs held by union members. The financial reason is very interesting. The salary of the State Auditor is directly related to the number of employees. More employees in the Office result in a higher salary for the elected official. That is why the State Auditor is paid more than the Secretary of State. Therefore, there is no financial incentive by the elected officials to limit the size of the Office, and there is financial incentive to grow government.
