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Quality of states’ internal audits varies widely

April 9, 2012

Mississippi steamboat REUTERS/Robert Galbraith

On March 20 the Center for Public Integrity published a project that had been more than a year in the works. Its ambitious goal: to evaluate each of the 50 states on 13 different measures of integrity.  Campaign finance law, judicial accountability and lobbying disclosure were some of the important topics tackled.

Also among the 13: the quality of each state’s internal auditing.

Internal auditing “tends to be overlooked, obscure and isolated.  But these are really key agencies of accountability,” said Nathaniel Heller, executive director of Global Integrity, an affiliate of the Center that helped design the study.

The Center describes itself as a non-partisan nonprofit that concentrates on ethics and public service, and though critics sometimes describe it as left-leaning, it has a record of critical review of politicians and policies of both parties.

Some of this study’s findings have come in for criticism, including its ranking New Jersey best across all 13 categories.  As Bloomberg columnist Jonathan Weil pointed, out,  New Jersey is the only state ever sued for fraud by the Securities and Exchange Commission. Lying to  municipal-bond investors about the underfunded condition of its two largest pension plans was the central issue. This study gave its state pension fund management an “A”.

Because the study evaluates the systems in place today, past transgressions like those are not factored in.

Most states did not do well in the overall rankings, but internal audit was an exception. Some 32 states got an “A” rating for their internal audits and only one,  Nevada, got a failing grade.

Mississippi tops in internal audit

Heller wasn’t surprised that internal auditing did fairly well. There are fewer special interests battling over it, and politicians generally have a good amount of cover when pushing for fiscal accountability of government, he said. What taxpayer doesn’t want that?

Mississippi ranked highest in internal auditing, getting 99 points out of a possible 100.

A conversation with Mississippi’s auditor Stacey Pickering quickly made clear why the state did so well.

  • Pickering is directly elected. He doesn’t have to answer to the governor, or the legislature, just the voters. “I call it the Barbasol test, ” Pickering said. ” As long as I can look  at myself in the mirror in the morning, I know I’m doing ok.”
  • His department has its own law enforcement division. Yes,  CPAs with guns. Pickering’s badge-wearing law enforcement staff  of 20 does a lot of work with U.S., state and local law enforcement.  Their finding of $170,000 in improper city credit card charges by  Southaven, Mississippi, Mayor Greg Davis, is currently in the headlines.
  • He can make sure his recommendations are followed. After finding a problem with the Clarke County circuit court offices’ management of its court restitution account, he issued an order that the county hire a CPA to do a forensic audit. If the auditor’s recommendations are not acted upon within three years, the auditor can take action. If funds have been misappropriated, the auditor’s office can investigate and demand repayment at any time.
  • The state auditor has broad authority, overseeing property audits everywhere from school districts to sheriff’s offices, evaluating how efficiently different offices perform, and educating local officials on good audit practices.

“It gains taxpayer confidence that government is operating without corruption,” Pickering said. “It’s my job to protect our state’s integrity.

Nevada objects to ranking a distant last

The state of Nevada was at the other end of the report card, getting an F for its internal auditing,  with a grade of just 44 out of 100 points.

Among the issues the researchers found in that state were:

  • Auditing entities including the attorney general’s office and the state’s legislative counsel bureau generally have other, higher priorities
  • They are led by or report to elected officials, leaving them more exposed to political pressures than internal auditors in other states.
  • They have a track record of poor follow-through on audit report recommendations.

Unlike Mississippi, auditing in Nevada is not centralized in one department, several different groups play a role, including an arm of the state legislature, a section of the department of administration and in some limited areas, the attorney general.

The state’s attorney general Catherine Cortez Masto, said her office is not responsible for internal audits, though she does sit on an executive branch auditing committee, with other officials including the state comptroller. This group, which is relatively new, oversees the executive branch audit process and Masto thinks it’s a step in the right direction in terms of fiscal accountability.

Lorne Malkiewich, director of the Legislative Counsel Bureau, also takes issue with the description of his legislative auditor.  He said in an emailed response that  his audit division has no higher priorities, and he defended his staff as “highly professional, unbiased, and effective.” 

Malkiewich serves at the pleasure of the elected legislature, but he said politics have no impact on audits. Agencies must appear at public meetings to report on their progress implementing the auditors’ recommendations.  Their reports appear on this public website.

Though the reports are public, the information posted is not sufficient to assess whether real change was made, said Geoffrey Lawrence, deputy policy director for the Nevada Policy Research Institute (NPRI), which describes itself as a free-market think tank. Lawrence  was interviewed for the State Integrity report.

At the very least, Lawrence told us, Nevada needs a more robust auditing operation. Clark County, which contains Las Vegas, performs 25 to 30 audits per year, while the state figure is generally half that, he said.

NPRI has recommended that Nevada change to an elected auditor like Mississippi and other states, but has not found great public concern about the issue.  “In Nevada people have become desensitized to stories of corruption,” he said.

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