Association of Local Government Auditors

I've been thinking a lot about how to audit smarter, and how to convey my thinking and conclusions to my managers and staff. It's important that I explain my thinking because it could be wrong, and because if it's right, then they will incorporate that thinking and better pursue our office priorities.

I believe there are three general ways we can audit smarter: by being more efficient with our resources, by being more effective with greater impacts, or by answering the most important questions posed by leadership or the public. The first two can be measured, the last is more difficult.

So let's think about the first two ways together. The chart below is based on a bunch of numbers I made up, but it will serve as a good illustration of my thinking. The scattergram charts the individual cost of an audit, on the X-axis, against its dollar benefit of the audit on the Y-axis. The uppermost point represents an audit that cost $278,000 and had recommendations valued at $2.7 million. (This could be an audit to identify uncollected revenues.) On the opposite end are a number of small audits, costing $5,000 to $30,000 with little or no measurable benefits. This could be something like a routine change of director audit.

I also drew lines to show the medians, dividing the graph into quadrants we can think about. The benefit median line seems low, except that many of our audits are conducted without much of an expectation of benefits. Internal control audits are a prime example. If we can get out at a cost of less than $20,000 we're feeling pretty good. Over on the far right is a $482,000 audit with a $109,000 benefit, which could be the poster-child for the poorly managed runaway audit, or a complex question to be answered, with some incidental savings identified. For those audits we anticipate little savings, we should plan on getting in and out as quickly as possible.

But smarter auditing is also finding those bigger savings even if they take longer to complete. The upper right quadrant produces the most benefit since on-going savings of $400,000 from a $200,000 audit produces more than $100,000 of on-going savings on a $30,000 audit. The first audit nets $1 million in three years, whereas the second nets only $270,000. Sure the return on investment is higher with the smaller audit but I suspect taxpayers would favor bigger savings. (These estimates exclude implementation costs of recommendations, which an agency may be more likely to defer for a $100,000 finding.)

I think the best schedule is a mix of audits, and knowing which quadrant an audit will be in can help reduce surprises and improve planning. Within that context, what can we do to work toward the low-cost end of the upper right quadrant? Here are some of the ideas we are trying in my office.

Audit idea file

As I said in my previous columns, the best findings often come from information provided to us by front line staff of agencies. We need a good method for capturing those ideas so that we can review them periodically when we develop our audit schedule. I would note that most fraud is not found in the course of an audit but by accident, or more likely a suspicious co-worker or disgruntled spouse. It really pays to have a reputation as the go-to agency when something doesn't look right. In addition, our own front line auditors often encounter other potential audit topics in the course of their work, and gathering those ideas in a systematic way ensures that we aren't just relying on our memory.

Those ideas can help our audits focus quickly on the key findings without spending a lot of extra hours in the survey phase. The likelihood of good audit results increases, especially if we get multiple issues within one agency. I tell my auditors that our job is walking around looking for trouble, and then we just have to figure out the solution.

Lean down your work processes

If your audits seem to take too long to get out the door, they probably do. Set some milestones, track the hours, and watch the process. We surveyed our auditors and asked where the delays occurred and found that our quality assurance process seemed to be a bottleneck.  I developed a flowchart of our process, identifying the steps and roles of each person.  Each step was a sheet of paper and we covered a wall with about 65 different steps. We were able to see the places where we needed to rethink some of our steps and reassign roles.

I look at a draft report early to get the big issues but I also restrain myself from getting involved later because others are paying attention to the details. That was another frustration, with everyone taking one more look and making minimal changes, delaying release by days and days.

I want to advocate for this streamlining approach in the course of our audits as well. Ken Miller, who spoke at our San Francisco annual conference, had a great Governing column recently called "A Broken Record" about the misguided notion that people are the problem when it's really the systems that are broken. I think we can add immense value if we point out overly complex procedures in agencies that could benefit from a review by their management. Management can apply various methods such as Lean or Six Sigma.

It's not about you, it's about them

If you are an expert in accounting then you are more likely to tell an agency about their financial problems, and may not recognize other types of problems. It would be like having an orthopedic surgeon as a family physician. Your feet are likely to be in perfect shape but the rest of you may fall apart. A specialist doesn't always add the most value to an agency. Auditors need to expand their toolkit and be able to diagnose the most serious problems an agency has.

Consider using experts under contract to help expand your toolkit.  Send your auditors to training that doesn't have audit in the title. Acquire software that expands your horizons. The more of these tools you have, the more you can answer those difficult questions that officials and the public are asking. Sometimes wise decision-making by leadership has an immeasurable value.  Knowing something is working well may not save money but it reassures everyone that good things are happening with public dollars. If we find things aren't working, then we have a basis for improvement. But we have to commit ourselves to asking the question first in order to find out the answer.

Lastly, smarter auditing promotes change without thumping an agency.  I wrote awhile ago about minimum force necessary, which is the smartest auditing you can do. Persuasion empowers an agency, but an agency that has been humiliated and extorted by an audit leaves it less able to move forward with our recommendations. Making government better is the smartest and most important thing we must do. Period.