As many of you know, I was one of 11 individuals from state and local governments to receive Governing magazine’s “Public Officials of the Year” award for 2003. We were presented our awards at a nice dinner on November 13th in Washington, D.C. Award recipients were each supposed to speak for about three minutes and we were specifically instructed not to thank anyone.
Instead, we were to tell stories or describe lessons we’d learned in our careers. So I’ve got an audience of about 200 top officials from state and local government, corporate big wigs, media representatives and many of the staff of a widely read and influential national magazine devoted to covering state and local government.
And David Walker, Comptroller General of the United States is also there. I felt like I was not only speaking for myself. (What can I say in three minutes about a professional career spanning nearly 30 years? Good lord, that’s only a minute a decade. Six seconds a year.) But I was also representing all my friends and colleagues in local government auditing. What can I tell these people about local government auditing? What can I say that conveys the breadth, scope and significance of what all of you do, and of its potential for contributing to government citizens can trust and respect?
It took a bit longer than three minutes, but I told two stories.
The first story.
In the middle 1980s, I was a young audit hotshot. I joined the Tennessee State Auditor’s Office in program evaluation in 1978. By 1981 I was the head of that office’s performance audit group and by the time we began a routine performance audit of the state department of banking, I was beginning to compile a record of successful audit work. Early in the audit we asked to look at bank examinations. We were told that the examinations contained a great deal of confidential financial information about private individuals and that the only way that the department could give them to us was if the names of the individuals were blacked out. We were told that this would be a lot of work for the department and that they weren’t entirely sure we were entitled to see the information. And besides, banks don’t fail anymore. So, intimidated, I acquiesced. We did not review bank examinations. Our audit focused on such vital questions as whether the examiners had all the right certifications and whether they were being efficient in scheduling travel as they went about the state examining banks.
We released the report on a Wednesday. The following Sunday the Butcher banking empire in Tennessee collapsed. It was the largest bank failure since the Great Depression. In the turmoil that followed it quickly came to the legislature’s attention that I had just completed an audit that revealed no problems with bank regulation in the state. I was hauled before various committees of the legislature and ridiculed. One Senator thundered that he didn’t see the use of my audits since if every bank in the state had been about to fail I probably wouldn’t have noticed. They were right of course. I took the pounding and somehow held on to my job. But I learned a lesson. I don’t want to look at issues on the margins of the agency I’m auditing. I follow the principles of centrality, materiality, and sensitivity. I want to examine functions that are in the center of what the agency does. If it’s the banking department, examinations are central to what they do. I want to audit material issues, that is, those that touch a lot of people or a lot of money. Most of the money the banking department spent was on examinations. And I want to audit sensitive is sues, that is, issues that people care about. People care about whether the banks they have their money in are solvent.
The second story.
In the early 1990s it became clear to me that Kansas City had substantial problems with its street light system and that I should do some sort of audit of the system. When I began the audit, the city’s veteran public works director, whom I respected a lot, was furious with me. He basically said that he was offended that I was trying to second-guess their management of the system and that it was arrogant of me to assume that I knew more about how to run the system than his engineers. Early in the audit we saw that the city was renting an inefficient and substandard system from the electric company. The city had only about half as many lights as it should have and two-thirds of the lights were old technology mercury vapor lights that used more electricity and produced less light than more modern designs. It was clear that the city should own the system rather than rent it and that the system should be substantially upgraded. The city’s engineers recognized that too, of course, and had been trying to purchase the system for ten years, but the rules under which the purchase would have to be made were written in the state capital by the state public service commission. The electric utility lobbied the regulators heavily and the city had never really been involved so the rules heavily favored the utility. We found that by virtually any measure the city was paying premium prices for a substandard system. Under the circumstances the system was a cash cow for the utility. My staff put together a chronology of the city’s attempts to purchase the system that looked like Charlie Brown trying to kick the football and Lucy pulling it away from him. I realized that simply presenting that chronology in the audit would be a powerful device and we focused the audit on the costs and benefits of purchasing and upgrading the system.
The problem the city’s engineers faced was on many levels a political problem and they simply could not solve it through good management. Presenting the facts in a clear, compelling and public way began a community dialogue that eventually resulted in voter approval of a $110 million general obligation bond issue to purchase the system for a reasonable price and upgrade to a state of the art system with a significantly lower cost per light. Several years after the audit was completed, the public works director who was initially so angry with me came up to me and told me it was one of the finest things I had ever done. The lesson that I learned is that successful audits often contribute to the solution of political problems, and, of course, many of the big problems in our communities are political problems. Audits allow governance systems to work better by improving the political process by improving the information available to stakeholders.
Truth and transparency.
These ideas did not come to me as bolts out of the blue, but as the result of years of reflection on the precipitating events. The first story is about what and how to audit: drive for information that is important and do everything possible to get that information. The second story is about why we audit: because audits can bring to the community important information to make better decisions and improve the quality of life for all of us.
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Funkhouser on Auditing