Tracking the Recession: Cuts, Stimulus Create Risk for Auditors

Budget cuts are taking a toll on state auditors, the people charged with finding waste, fraud and abuse in government and measuring whether programs and services are accomplishing their goals.

Auditors usually work tediously behind the scenes, rarely getting attention, but now their jobs are threatened just like most state employees because of what may turn out to be the worst downturn affecting states since the Depression.

Widespread budget cuts have reduced staffing in many states, testing auditors’ ability to keep up with their normal work, they say. On top of that, the requirements laid out by the Obama administration for state officials to track how their state is spending its stimulus money is adding to the challenge.

In many ways, the state government auditing community is on the spot as never before. State leaders are looking to auditors to help them figure out how to save money as tax revenue from nearly every source has declined. At the same time, federal officials expect auditors to follow how billions of stimulus dollars are spent in their states.

“It’s a huge challenge but it’s also a huge opportunity to show that we can do this,” said Elaine Howle, the California state auditor.

Howle’s office already has halted travel and recruiting, reduced training and eliminated bonuses and could face deeper cuts if California voters reject five budget measures in a May 19 special election . Florida’s auditor general instituted a hiring freeze, with 40 jobs vacant, and has cut back the number of programs it will review. Utah’s 30-person legislative audit office won’t fill four jobs but will try to do the same amount of work.

“It’s going to wear people out,” said Tim Osterstock, Utah audit manager.

It will also raise the danger that auditors won’t catch waste and fraud, they say. “Government generally has to provide the same level of service whether there are budget cuts or not,” said Don Hancock, Florida deputy auditor general for state government audits. “If there are cuts, it increases the risk of exposure to waste and fraud and errors.”

A major outcome of the budget cuts, auditors say, is likely to be fewer performance audits, which are critical to saving tax dollars and determining whether a state program or service is getting the intended results.

Auditors are probably best known to the public for conducting financial audits to check the accuracy of an agency’s fiscal statements, internal monetary controls and compliance with federal and state laws.

Nebraska auditors , for example, recently found the state department of labor overspent its budget by $6.9 million because of accounting errors. Texas auditors revealed that the state juvenile corrections agency did not competitively bid $19.5 million in 11 contracts. Illinois auditors disclosed that the state employment security agency overstated its allowance for uncollectible taxes by $24 million.

Performance auditing, which is relatively new, goes beyond the numbers to assess execution of programs and services. Auditors usually conclude such reviews with recommendations for policymakers to save money and fix problems.

“Performance auditing lifts auditors’ sights beyond the spreadsheet adding up to answering the question, are these state investments achieving their intended outcome?” said Neal Johnson, director of the Government Performance Project at the Pew Center on the States in Washington, D.C. ( Stateline.org also is a project of the center).

Michigan auditors recently found that nearly 2,000 day-care providers approved by the state human services agency had criminal backgrounds. The agency has since shut them down and implemented tighter controls on background checks.

Virginia Gov. Tim Kaine credited a performance audit of state-financed pre-kindergarten education in part for winning $22 million from the General Assembly to pay for an additional 4,300 students to enter a program for at-risk children.

In Washington state, auditors examining extensive construction projects at the port of Seattle concluded that a lack of oversight led to nearly $100 million in unnecessary costs. The audit triggered a U.S. Justice Department investigation.

Performance audits are usually the first cut lawmakers make in an auditor’s office because they generally are more expensive, time-consuming and not always required by law as are the financial audits. The irony, auditors say, is that such audits are more beneficial to lawmakers and governors during a downturn.

“Performance audits are most needed during bad times because you can tell the legislature which programs to put more money or less money,” said Rakesh Mohan, Idaho’s director of performance evaluations, whose office has been cut by 8 percent over two years . “These cuts will affect the amount and scope of work that we do.”

Washington state auditor Brian Sonntag, a Democrat who is elected by voters, has been battling the Democrat-controlled legislature this spring over money for performance audits. Washington voters approved a ballot initiative in 2005 setting aside a percentage of the state sales tax to pay for performance audits. Lawmakers want to take $15 million from Sonntag and give it to auditors who work for the governor and legislature to help finance their work and balance the state budget. The $15 million would amount to a 75 percent cut to his agency, Sonntag said.

Rep. Kelli Linville, a Democrat and a key budget writer, did not return a telephone inquiry. According to news accounts, Linville has said lawmakers want to make sure when the state spends money on a performance audit that Sonntag can guarantee a return on the investment.

“Essentially, they’ve put a bounty on our auditing work,” Sonntag said.

State auditors such as Sonntag say they are willing to absorb their share of cuts. Still, they say, their offices should receive some dispensation because they are one of the few agencies that save the state money. Sonntag says his audits save taxpayers about $10 for every $1 spent on them.

Scott Strong, deputy auditor general of Michigan, said, “Our office more than pays for itself in savings every year.”

In any other year, the budget cuts alone would be enough to test auditors. But the federal stimulus package has added a layer of complexity to their work. State auditors are supposed to assist federal auditors in setting up a way to track how the stimulus money is spent. The federal legislation requires states and local governments to account for the money in real time- as it is spent- instead of examining the books after it is spent as is usually the case.

Howle, of California, said that in addition to reduced staffing, another problem is that state agencies that have never received federal money before do not have accounting controls established to monitor for abuse and waste. A state energy commission, for example, will be administering federal grants for the first time to low-income families to insulate homes.

A larger worry, she said, is a public perception that states are monitoring all of the spending when, in fact, local governments will have to account for the federal money funneled directly to them. Most local governments do not have the staffing or ability to audit the money, Howle said.

“They don’t have the capacity to deal with that,” she said.