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MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Administrator of Finance and Information Services, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
A Primer on Performance Audits
January 2007
By Mike Bailey, Administrator of Finance and Information Services, City of Renton
This month’s Finance Advisor column will review a topic that has been thrust into the forefront of Washington local governments, performance audits. The passage of Initiative 900 last fall placed this topic on everyone’s agenda. The initiative gives the Washington State Auditor's Office (SAO) responsibility for conducting performance audits of all levels of government in our state. The initiative, and lots of information about it, can be found on the Washington State Auditor’s Web site. We will refer to this later.
Performance Auditing is Nothing New
The concept of performance auditing is nothing new to many Washington local governments. Many medium to larger sized cities and counties have taken the initiative to conduct performance audits on parts of their operations. None, to my knowledge, have undergone performance audits for all of their operations. Some of the larger local governments have hired internal auditors who conduct and/or manage performance audits. Many have also conducted performance audits through contracting with consultants.
The types of firms that do performance audits vary widely. Some local government consulting firms which perform other consulting tasks (such as rate analysis) have added expert staff to expand their services into performance auditing. Across the nation, there are many firms that specialize in performance audits for certain types of services. For instance, while in Lynnwood, we contracted for a performance audit of our fire department with a firm out of Virginia that only provided these types of services. However, their specialization (and high degree of expertise) kept them in demand and conducting performance audits in this specialization around the country.
Some utilize CPA firms for performance audit work. In fact, the Governmental Accounting Standards Board (GASB) has adopted “Concepts Statement Number 2 – Service Efforts and Accomplishments” in support of this effort. This work is mostly about performance measurement, but has been extended by many to verification of the measures – or auditing. The city of Austin Texas has been a leader in performance measures for many years and has adopted the GASB model as guidance. The GASB is the same agency that provides the authority for financial auditing – therefore the linkage between financial auditing and performance auditing is very strong in the GASB model. The SAO will be using this type approach in its work.
Performance Measurement vs. Auditing
Another approach to performance auditing focuses more on management, organizational direction and accomplishment. Keys to this approach are a strategic plan developed at the organizational level. The plan identifies key goals and the strategies to accomplish those goals. The results of the goals are expressed in terms of “outcomes” or changes in the community that result from the successful execution of the strategies. The measurement of these outcomes is performance measurement and the verification of the outcomes is where performance auditing comes in. Add the dimension of the efficiency of accomplishing the desired outcomes and you’ve got a common focus of performance auditing – insuring that limited governmental resources accomplish the right things with the least amount of expenditure.
The SAO's Workplan
Under I-900, the Washington State Auditor’s Office is free to conduct the type of audits they deem appropriate. The initiative provides one of the largest performance audit budgets in the country according to Governing Magazine (See: “Scrutiny by the People,” by Jonathan Walters). In addition, Walters calls the workplan for the audits the most ambitious in the country. So, what are the plans that the auditor has for auditing local governments?
Initially, the SAO worked to build a team and the logistics to be able to manage this effort. Their “Performance Audit” Web site, which I referred to previously, provides a lot of insight into the approach to be taken. A review of the site illustrates numerous projects already underway. Most are being conducted through contracts with consulting firms. Most – to this point – have been focused on state agencies, especially transportation. The state legislature charged the SAO with some limited performance audit responsibilities prior to I-900 focused on transportation issues. As a result, this is where the effort started.
As the SAO continues to develop its performance audit efforts, look for more local government issues to come under the performance audit scrutiny. The SAO has indicated that much of the “field work” (i.e., the interviewing of staff and review of records that confirm representations by management) will be done by the existing audit teams. They have been providing training to the field teams for much of the past year to enable them to accomplish this effort. The field teams will be supported by specialists within the SAO’s Olympia office.
The SAO “Workplan” Web page illustrates numerous local government audits to be completed by June of 2007 and more to be completed at the end of 2007. While the performance audits are to have “entrance conferences” much like the financial audits, many local governments have received questionnaires inquiring about the two local government topics affecting cities and counties slated to be completed by June of 2007. These are “take home cars” and “overtime.” The letters requesting information on these topics ask general questions about practices. These questionnaires will be used by the SAO to determine who will and who won’t be audited. Once those selections are made, SAO will work with local government business managers and elected officials to schedule entrances. Cities and counties who were not selected will be notified. (Note – the rumor is that you are being billed for this work, but I’ve been assured that local governments will not pay the SAO for performance audit work. However, you will not be reimbursed for the efforts to comply with the performance audit).
The workplan continues to evolve. For instance, the SAO Website says future audits include “use of impact fees collected during calendar year 2005 by King, Pierce and Clark counties, and all cities with populations exceeding 40,000” and open public records practices by “state agencies, large counties and cities.” It is a good Website to visit from time-to-time to stay aware of the future subjects that performance auditing is likely to include. For now, these are the only subjects that appear on the Workplan affecting cities and counties through the end of 2007.
The size, shape and types of local governments across Washington State vary widely. That complicates the mandate to provide comprehensive performance audits of all local governments (and the state as well!).
How to Prepare
What should you do to prepare? First, create a strategic plan or organizational goals which illustrate the results your efforts are intended to have in your community (reduce public safety response times, provide recreational experiences, etc). Secondly, ask yourself how you determine the quality of the results. Start a systematic discussion (maybe once every other month or so) as to progress on your goals. Are your efforts having the intended results? Is there accountability for the effectiveness of the programs? How do you determine where to invest your budget resources - is there a connection to your goals and progress?
While no one can guarantee that the next performance audit topic will fit neatly into one of these issues, these efforts have been recommended by the SAO as a great place to get started.
Other Resources
If you want more reading, the GASB Website is a great place to start. Their work has established the vocabulary of performance auditing. Secondly, the International City and County Management Association has the Center for Performance Management. A great book on the subject (non-technical and discusses the advantages of performance evaluation in an engaging way) is “Measuring Up” by Jonathan Walters and is available on loan through the MRSC Library or for purchase through Governing Magazine. Lastly, there are many specialized web sites on performance measures (and auditing) which can be found through the GASB Performance Measurement Website and MRSC's Performance Measurement and Performance Auditing Web pages.
Mike Bailey is currently the Administrator of Finance and Information Services for the city of Renton. Previously, he worked as the Director of Finance for the city of Lynnwood for six years. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.
*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.