Penny Wise, Pound Foolish
Richard Chambers, CIA, CGAP, CCSA, CRMA, shares his personal reflections and insights on the internal audit profession.
I admit that I am biased. As one who spent the majority of my audit career in the public sector, I strongly believe that government internal auditors play an invaluable role in protecting our interests. That’s why recent news reports regarding government auditors have been so deeply troubling to me.
In the corporate world, internal auditors have made incredible strides forward in the last decade. Our relationships with audit committees have strengthened, we are gaining a seat at the table with senior management at an ever-growing number of companies and, on average, our work is more appreciated than ever before. Meanwhile, a growing number of government auditors seem to be facing daunting new challenges.
Take, for example, the situation in West Palm Beach, Fla., where the city’s internal auditor recently resigned after the president of the city commission wrote her a letter outlining extraordinary reporting requirements on the scope and nature of her work and advising that she not meet with "any persons from outside the city" unless he approved. In a chilling blow to audit independence, the commissioner warned that failure to obey his commands would be construed as "insubordination." The action was taken despite that fact that the city’s internal auditor did not report to the commissioner personally. As commission president, he leads a five-member committee that oversees the auditor; yet he sent the letter without consulting any other committee members.
The letter was not the beginning of the Palm Beach assault against internal audit. Budget is also an issue: Under the leadership of West Palm Beach, 14 local cities are in a legal battle against paying for the Palm Beach County Office of Inspector General. As the Palm Beach Post recently stated, “Combined with the attempt to intimidate the auditor, West Palm Beach looks like the city where oversight goes to die.”
Are government auditors truly a necessity? I think the answer is obvious. Take the recent theft of more than US $53 million by a city finance officer in Illinois — a staggering loss for a town of only 16,000 people. Press coverage indicates that the fraud went on for years; yet the problem was only discovered when the accused finance officer took a vacation, leaving someone else to fill in and unearth the problem. This is a case where an ounce of internal audit “prevention” a few years ago could have been worth a pound of cure today, but when it comes to internal audit too many governments are being “penny wise, pound foolish.”
The magnitude of the Illinois crime points out why even the smallest local governments (and smallest companies) need internal audit, at the very least on a part-time basis. But at the same time the fraud made headlines, other ominous internal audit news was receiving only limited coverage: headlines like The Globe and Mail’s April 30 “Ottawa’s Quiet Removal of Internal Auditors Draws Fire,” reporting on the elimination of about 20 internal audit jobs. The Public Service Alliance of Canada, the union that represents the unemployed Ottawa auditors, says it’s a risky decision to take away financial oversight at the department level and one that makes losing — rather than saving — taxpayers’ money more likely, according to the paper.
It’s no surprise that the current economic environment is taking its toll on government audit jobs. But as auditors, we know that controls are most likely to fail when systems are undergoing change — and with shrinking tax revenues and soaring demand for social services, many government programs are changing now, so the need for government audit has rarely been greater.
The recent headlines are troubling, but they are also helpful because they shine a spotlight on today’s government audit challenges. By bringing transparency to some worrisome issues, the headlines can serve as a reminder that we all need to keep a watchful eye on our own local governments and their treatment of auditors and audit budgets.
Posted on May 10, 2012 by Richard Chambers
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Public sector auditors are definitely needed. It is unfortunate that many audit functions are now "on the chopping block" as budgets become tighter. This is the time when internal audit's presence is needed more than ever. To add to your observation, I would say that the sentiment expressed in this post also extends to colleges and universities. I view these as quasi governmental agencies. Fortunately, they have some additional sources of funding and therefore are not totally dependent on local and federal government funds.