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!