Crack Auditors

Last week, the New York Daily News ran a devastating editorial criticizing the auditors in the New York State Comptroller’s Office. It was a good editorial, but it failed to understand the inner workings of the Office.

There are two classes of employees – career professionals and political appointees. The career professionals have to report to the political appointees. 

In fact, all audits must be approved by the political appointees before any work can be started.

The career professionals were calling for audits of the on-going construction at the World Trade Center. This is one of the largest construction projects in the world and should rightfully have been on the radar screen.

Unfortunately, the political appointees simply did not want the construction projects audited – an area that auditors know is ripe for fraud, waste and improper transactions. This is an area that can produce significant cost savings and can prevent shoddy work from proceeding if it is identified early on.

Years ago, the Comptroller’s Office was run at the political level by professionals with credentials. Unfortunately, under convicted felon Comptroller Alan Hevesi, the tilt toward appointees with no background in accounting or auditing began. Mr. Hevesi fired one of the country’s top accountants and put in place a person without the credentials for the job. That pattern remains today.

It’s a sorry state of affairs when talented career professionals are constrained from doing their job by political considerations.

The current organizational structure of the New York State Comptroller’s Office simply does not provide the auditors with the level of independence needed to properly carry out the job.

You can read the Daily News editorial at:

http://www.nydailynews.com/opinions/2011/08/22/2011-08-22_count_those_tix_tom.html

As they target the Port Authority for the mother of all audits, Govs. Cuomo and Christie have shown zero interest assigning the job to New York State's chief auditor, Controller Tom DiNapoli.

And who can blame them? DiNapoli has a well-established record of firing pop guns at charging grizzly bears.

Consider the Port Authority report DiNapoli put out on Wednesday - two days before the PA's vote on major toll and fare hikes.

Focusing on overtime, DiNapoli made out like he had discovered a motherlode of waste that was blowing holes in the authority's books - and setting up bridge and tunnel users to be hammered.

As DiNapoli knew, the PA's cash crunch has little to do with its $86 million tab for OT - which is less than 4% of a $2.5 billion operating budget.

Since the authority has kept those expenses flat for three years, DiNapoli failed to show any actual waste. The worst he could tut-tut was that "the agency should take a long, hard look at whether its business model for managing overtime really makes sense."

Yes, please, a long hard look.

What really drove the toll hike was a multibillion-dollar gap between collections - which fell dramatically in the economic meltdown - and what the authority needs to complete rebuilding the World Trade Center while keeping bridges, tunnels and airports in shape.

But DiNapoli did not tackle the crucial question that Cuomo and Christie want answered in an audit to be done by an outsider: Which planned projects should be chucked and how can contracting costs be driven down?

Small-bore auditing is standard for DiNapoli.

A few weeks ago, he and city Controller John Liu teamed up for a look at how the Metropolitan Transportation Authority handles construction-related service disruption. They found no real mismanagement, but trumpeted their nonfindings to pander to inconvenienced subway riders.

On Friday, DiNapoli announced with fanfare that he was dispatching crack auditors to the New York State Fair, "to ensure reliable reporting of Midway ticket sales." Go get 'em.

The Unsung Heroes of an Organization

In my 36 years of auditing, I’ve had the pleasure to work with many people who made the job enjoyable. These people made a significant contribution, but may not have been recognized for the outstanding work they did.

These people are my heroes.

By hero I mean an ordinary person who does extraordinary things, despite the odds being stacked against them. They typically prevail in the end.

Today, I’d like to recognize two of my heroes – Jimmy Morrissey and Eileen Chambers, recently retired from the New York State Comptroller’s Office.

I first met Jim and Eileen when I was asked to take over the State Expenditures Bureau in the State Comptroller’s Office. This bureau was responsible for auditing all expenditures in the State of New York before they were paid. It was a labor-intensive, clerical audit operation. My goal was to transform it into a modern, risk-based professional audit unit, using the latest audit techniques to find fraud, waste, and improper transactions. 

At first, I turned to people who were in higher grade levels, but I learned that many of these people were the caretakers of the organization. There was a system in place and they were the guardians of that system. They made it work and they didn’t want anything to disturb the daily flow of activity.

I needed to find the leaders who were willing to embrace a new way of doing business and willing to learn about new data analysis tools. Jim and Eileen soon emerged from the crowd to demonstrate that leadership. While they were not the managers of the organization, they were the staff people who understood how the system worked and how it could be changed.

I don’t think they know how important they were to modernizing the audit and payment process in the State of New York.

Eileen Chambers went on to become one of the best speakers I’ve ever encountered. She received a standing ovation from her peers as she taught others about the changing audit approach. And when others wouldn’t, she would go to the field to confirm her audit findings. I still remember the pictures she would take to demonstrate some stupid payment an agency manger would want to make – for example, a doctor who claimed to serve the disabled, but had an office that was not accessible to the handicapped! The picture told a real story.

Jim Morrissey was too often being told by his manager or supervisor, “there was nothing there.” Meaning the audit issue wasn’t worth pursuing. This is an easy tack to take – it doesn’t require a lot of work. Despite this lack of support, Jim forged ahead and uncovered more improper payments than other auditors. More importantly, Jim was always going to the field to verify the substance of the underlying transaction. He found printers in storage purchased from year end funds; a payment to clean a smokestack, but when he climbed it he learned the work was not done. He found fraudulent documents that were used to support payments because he took the time to go to vendors to see if the documentation was proper. His work was a shining example to others.

Jim and Eileen are the unsung heroes of the organization. They are role models young staff and others would do well to emulate.

My life has been enhanced by working with them. 

I salute their efforts and the significant contributions they made to improve the audit practices in the New York State Comptroller’s Office. As they move on to new adventures in life – I wish them Godspeed!

Audit Findings without Impact – Why do Auditors write this Stuff?

This week I reviewed an audit report for a government agency that spent more than $3.2 billion in the last two years. The auditors concluded the agency did a good job spending this money, but for some reason felt compelled to write about the most insignificant of issues.

By doing so, these government auditors are harming their credibility for the public to pay attention to future findings of significance.

The auditors concluded, “[the organization’s] management and operating practices generally resulted in appropriate expenditures in all areas examined, including consulting and service contracts, discretionary spending and the cost of debt. Expenditures were business-related and generally reasonable and necessary. The [organization] also monitored costs to ensure it was obtaining services and items at a reasonable price.”

Unfortunately, the auditors then go on to say, “Although discretionary spending generally appeared reasonable and proper, we did identify certain expenditures totaling approximately $340,000 over the two-year audit period where we question if the purpose and/or the amount of such expense represents the best use of public funds particularly during what are difficult fiscal times ….. These expenses included amounts the [organization] paid to host annual parties and picnics for employees, retirees and their children; for empathetic flowers and other gifts; and for other socially-oriented events. The [organization] also spent a significant amount on employee recognition awards and ceremonies.”

And the recommendation is simply the opposite of the condition found. It’s not based on any cause related to the condition. It simply said, “Limit or eliminate spending on nonessential items such as parties, ceremonies, gifts and memberships.”

I would think that .01 percent of total expenditures would qualify as a “limited amount of spending.”

In responding, the head of the agency said, “…management seek[s] to retain the benefits inherent in such programs including employee retention in the highly skilled and competitive […] industry.”

Some auditors seem to have a hard time acknowledging that an agency does a good job. No matter how good something is, there will still be some criticism.

But shouldn’t the audit finding be well developed and follow the guidance in the government auditing standards? A good audit finding includes a number of important elements, including criteria (what should be), condition (what is), effect (the impact of the condition not equaling the criteria), cause (why the condition doesn’t equal the criteria) and recommendation (how to fix the cause).

Most of these elements were missing in this finding.

In this case, there were no criteria to describe what an appropriate discretionary expenditure would be. By its very nature, a discretionary expenditure depends on the judgment of the managers at the agency.  Clearly, these managers saw these expenditures as important to employee morale and retention in a highly competitive business.

According to the Government Auditing Standards, the effect is a clear, logical link to establish the impact or potential impact of the difference between the situation that exists (condition) and the required or desired state (criteria). The effect or potential effect identifies the outcomes or consequences of the condition.

The auditors struggled for effect and finally settled on, “…we question if the purpose and/or the amount of such expense represents the best use of public funds particularly during what are difficult fiscal times…”

This agency though, isn’t struggling.  It is not funded by tax dollars – rather it is funded by user fees. And the audit did not imply that the user fees were not sufficient to cover the cost of its operations. If it had, maybe there might have been some justification for this finding.

The cause identifies the reason or explanation for the condition or the factor or factors responsible for the difference between the situation that exists (condition) and the required or desired state (criteria), which may also serve as a basis for recommendations for corrective actions.

The auditors simply did not identify a cause in this finding.

As a result, the recommendation was simply the opposite of the condition - a recommendation that doesn’t add real value.

I’ve read too many audit reports that have insignificant findings in them. The government auditing profession should recognize that many managers really do a good job. Audit criticism should be saved for items of real significance – not nit-picking items that can’t be fully developed according to the government auditing standards.

Write about the right stuff!

Data Analytics – The Future of the Auditing Profession

This week, the Wall Street Journal reported on the increasing attention business schools are giving to teaching students about data analytics. This is a critical skill that all auditing professionals should be embracing.

The traditional audit approach of selecting a sample of transactions to review is really obsolete. The  skilled auditor uses data analysis and data mining techniques to examine all of the transactions in a file to look for trends, patterns or outliers that are indicative of fraud or errors. They can then narrow down the problem population for further analysis.

Bernie Madoff demonstrated that he could produce millions of fraudulent documents AND THE AUDITORS PROVED THEY COULDN’T DETECT THEM!

If in fact the auditors (or regulators) had been using data analysis techniques, they might have been able to detect trading patterns that were not consistent with daily stock prices. They might have stopped this scandal long before it harmed so many people.

In New York, I lead the effort to move to sophisticated audit tools including data analysis, data mining, and data mapping in the Medicaid program and in auditing all of the State’s expenditure transactions. These efforts dramatically increased the audit findings, enabling more auditors to use the tools effectively and resulted in cost savings approaching $2 billion in the last year.

The challenge though is to increase the skill level of the staff to use and embrace these tools.

As reported in the Wall Street Journal:

Business Schools Plan Leap Into Data

Faced with an increasing stream of data from the Web and other electronic sources, many companies are seeking managers who can make sense of the numbers through the growing practice of data analytics, also known as business intelligence. Finding qualified candidates has proven difficult, but business schools hope to fill the talent gap.

This fall several schools, including Fordham University's Graduate School of Business and Indiana University's Kelley School of Business, are unveiling analytics electives, certificates and degree programs; other courses and programs were launched in the previous school year.

International Business Machines Corp., which has invested more than $14 billion buying analytics industry companies such as Coremetrics and Netezza Corp. since 2005, has teamed up with more than 200 schools, including Fordham, to develop analytics curriculum and training.

"The more students that graduate knowledgeable in areas we care about, the better it is not just for our company but the companies we work with," said Steve Mills, IBM senior vice president and group executive of software and systems. "It really comes down to what clients and customers need most."

Data analytics was once considered the purview of math, science and information-technology specialists. Now barraged with data from the Web and other sources, companies want employees who can both sift through the information and help solve business problems or strategize. For example, luxury fashion company Elie Tahari Ltd. uses analytics to examine historical buying patterns and predict future clothing purchases. Northeastern pizza chain Papa Gino's Inc. uses analytics to examine the use of its loyalty program and has succeeded in boosting the average customer's online order size.

As the use of analytics grows quickly, companies will need employees who understand the data. A May study from McKinsey & Co. found that by 2018, the U.S. will face a shortage of 1.5 million managers who can use data to shape business decisions.

XO Communications, a business-to-business telecommunications-services company, has been looking to increase its analytics team but is coming up short. Trent Taylor, director of customer intelligence at XO, said it isn't easy to find someone who can pick up the business context while understanding statistics and how to structure a project. Cris Payne, senior manager of customer intelligence, said XO would "strongly consider" hiring M.B.A.s if they had such abilities.

Fordham this fall will introduce a required analytics course—Marketing Analytics —for M.B.A. students on its marketing track. "Historically, students go into marketing because, they 'don't do numbers,'"said Dawn Lerman, director of the business school's Center for Positive Marketing. But these days, with so much data available surrounding consumer behavior, "you can't hide from math and statistics and be a good marketer."

Ms. Lerman said the new class is intended to address marketing metrics related to in-store and online brand performance. Fordham also plans to introduce a master of science in Market Intelligence in 2012.

The University of Virginia's McIntire School of Commerce has been working with data-warehousing company Teradata Corp. for years to make analytics a bigger part of students' curriculum, said Barbara Wixom, associate professor and director of the M.S. in Management of IT program at McIntire.

The school this fall will introduce an elective track focused on analytics and also will start working with IBM. "What has changed is the type of students who want these tools," Ms. Wixom said. Nowadays analytics is being used in classes for marketing and finance; not just IT, she said.

"Analytics is certainly in the top five things [executives] are worried about and investing in actively," said Scott Gnau, president of Teradata's Teradata Labs. "Industry is going to demand it. Students are going to demand it."

Consulting companies, especially those with clients in IT, marketing and sales, also have a need for employees with a background in analytics.

Deloitte LLP paired up with Indiana University's Kelley School of Business last November to offer a certificate in business analytics to its midlevel employees. The certificate program included courses like Business Analytics Foundations and Data Mining and Visualization. The school tailored a similar certificate for employees of Booz Allen Hamilton Inc.

And beginning this September, Kelley M.B.A. students will be given the option to major or minor in business analytics.

Meanwhile, the Villanova School of Business is revamping undergraduate requirements to include more statistics. It began introducing new courses over the past few years. Beginning with this fall's incoming freshman class, the school will replace some of its calculus material with statistics and add an Introduction to Business Analytics course.

The Center for Customer Insights at the Yale School of Management offers students the chance to work on analytics projects for, and with, companies. One such project with an accounting software company used analytics to search customer feedback for signs of dissatisfaction and suggestions for improvement.

Ivan Dremov, a 2011 Yale M.B.A. graduate with a background in executive recruiting, who worked on this project, said it prepared him to do similar work at his new employer, a New York area strategy consulting firm. "When you tell them you can do an analytics project using sophisticated software, it's definitely something they pay attention to," he said.