bsw value of muni audits

The Value of Municipal Internal Audit

September 17, 2015

Ron Steinkamp, CPA, CIA, CFE, CRMA, [email protected]

mailto:[email protected]

http://conference.iml.org/?section=17

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• Who has an internal audit function?• If so, is it providing value?

• If not, why not?• What value does internal audit provide?• What value should internal audit provide?

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Questions

© 2015 All Rights Reserved Brown Smith Wallace LLC

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• Internal Audit Background & Purpose• Internal Audit Best Practices• Elements of an Effective Municipal Audit

Activity• Key Internal Controls

• Internal Audit Case Studies• Establishing an Internal Audit Function

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Agenda


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Internal Audit Background & Purpose

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Internal auditors can be of great value to government leaders:– Assist in monitoring the design and proper

functioning of internal control policies and procedures.

– Help improve overall control environment.– Conduct performance audits, special

investigations and studies.

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GFOA Best Practice


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GFOA recommends that:– Every government consider the feasibility of

establishing a formal internal audit function. Can be internal or outsourced.

– Internal audit function be established by formal charter.

– Internal auditors follow professional standards.– Head of internal audit hold a degree an

professional certification.

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GFOA Best Practice


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• Cornerstone of good public sector governance.

• Provides unbiased, objective assessments of whether public resources are managed responsibly and effectively to achieve intended results.

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Internal Audit Role


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INTERNAL AUDITING PROVIDES:– Assurance that the Municipal organization is

operating as stakeholders intend – Insight for improving controls, processes,

procedures, performance, and improving accountability with public dollars

– Peace of mind to the public that their efforts and contributions are not being wasted


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INTERNAL AUDITORS:– Have a variety of skills, educational backgrounds,

and expertise.– Use broad knowledge of governments to help

achieve objectives.– Are risk and control experts and problem solvers.


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Cost Savings and Revenues EnhancementsAuditors help identify opportunities for cost savings and revenue enhancement:• Audits of overtime saved a small city $350,000; a larger city saved more

than $2.8 million annually.• A city saved over a million dollars with an audit of employee health

coverage; another city saved $54 million.• A large city identified over a $1 million in overcharges for construction.• A city collected over $2 million in underpaid business license taxes over

ten years.• Auditors recovered $2.1 million from one concession contract.• A small city found $15,000 overcharged by one vendor, and $30,000 by

another; cities found office supply overcharges in the millions of dollars.

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Your Auditors Are a Wise Investment


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Policies and Implementation: Monitoring Program PerformanceAuditors ensure that program performance is meeting the community objectives that underlie policy directives. Audit recommendations help improve service delivery as well as prevent future liabilities and costs:• An audit of codes and inspections in a large city found that inspections

required by state and local law were not being performed.• An audit revealed city board approved procurement and competitive ‐

policies were “routinely ignored”.• An audit of family investigations in a state addressed badly needed

changes to case management.

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Fraud preventionAuditors play an important role in detecting fraud and recovering dollars. Even more importantly, auditors work to prevent fraud by identifying risks and auditing controls.

They help protect your government’s reputation for good stewardship through training, monitoring hotlines, and audit recommendations aimed at prevention.

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The Data and the Facts You Need for Making DecisionsAuditors provide objective information for informed decision making.• Performance audits of streets infrastructure and pensions

helped two local governments balance competing priorities, win voter approval for initiatives, and avoid future costs.

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Internal Audit Best Practices


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1. Organization independence

2. A formal mandate

3. Unrestricted access

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Elements of an Effective Municipal Audit Activity


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3. Sufficient funding

4. Competent leadership

5. Objectivity

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7. Competent staff

8. Stakeholder support

9. Professional audit standards

10. Focus on internal controls and compliance

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1. Separation of Duties

2. Documentation

3. Authorization and Approval

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Key Internal Controls


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4. Security of Assets

5. Reconciliation and Review

6. Fraud Policy & Reporting

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7. Access to Systems

8. Physical Control

9. Verification

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Internal Audit Case Studies


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Lets walk though examples of municipal organizations that had poor controls or no internal audit function.

Keep these in mind:-What happened?-How did it happen?-Did the organization have an Internal Audit Function?


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• What: High level employee embezzled $3.4 m

• How: Set up own company. County didn’t properly verify and monitor vendor activity.

• IA: Yes, but limited oversight

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Case #1 – County Health Department


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• What: Between 1997 & 2003, the Department purchased and left unused approximately 270,000 airfare tickets at a cost of $100m

• How: Inadequate system that relied on a manual process

• IA: Yes, but did not look in the right areas

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Case #2 – Defense Department


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• What: Town supervisor embezzled more than $750k from 2003 until May 2013. (town has annual budgets of $400k)

• How: Lack of internal controls

• IA: Not full time. Town has audits every 4 years

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Case #3 – Town Supervisor


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Case #4 – City Administrator


• What: City administrator gambled away city funds. He took numerous cash advances on the City credit card for gambling purposes

• How: Did not have any credit card policies or proper review procedures in place

• IA: No

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Case #5 – City Parks Department


• What: Chief Park Ranger stole around $500m

• How: He was able to submit false invoices for 8 years by setting up a fake company

• IA: Yes

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Establishing an Internal Audit Function


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Sourcing Options


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Sourcing Options


In-house

• Function is developed and maintained by the organization. • Costs are fixed.

Co-sourced

• Provider contracted to assist the in-house team on specific projects.

• Costs are partially fixed and partially variable.

Full Sourcing

• Entire IA function is contracted to a provider.• Costs can be fixed or variable.

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Sourcing Options - In-House


Benefits• Highest degree of control over IA function• High sense of organization connectivity• Knowledge of the organization, processes and people• In-house talent training ground

Concerns• Internal Audit not a core competency• Requires high level of management time and attention• Inability to own specialized resources• Increasing stakeholder expectations• Investments necessary to redirect the function• Continuous recruiting, training, methodology and technology

investments• Highest “fixed cost” model

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Sourcing Options - Co-Sourcing


Benefits• Functional control remains in-house• High sense of organization connectivity• Allows management to focus on core competencies• Access to specialized resources• Eliminate certain recruiting, training and employment costs• Cost flexibility via “as needed” resources• Access to state of the art technologies• Ability to terminate the relationship

Concerns• Provider’s organization and industry knowledge• Possible poor cultural fit• Shift from managing a department to managing a relationship• Dependent upon strong Chief Internal Audit Executive• Staff continuity• Certain overhead and support costs remain

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Sourcing Options - Full Sourcing


Benefits• High cost effective option• Allows management to focus on core competencies• Provider “owns” human resources• Provider responsible for day-to-day administration of the function and execution• Client controls risk assessment and audit plan• Cost and skill set flexibility• Highly specialized skill sets on as needed basis• State of the art technology/ knowledge sharing

Concerns• Comfort level of organization management• Knowledge of organization and industry• Possible poor cultural fit• Management must “own” all strategic decisions

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Internal Audit Development


Start-up and Infrastructure Development

Enterprise Risk Assessment and

Audit Plan Development

Entity Level Risk Assessment and Audit Program Development

Audit Program Execution and

Reporting

Phase 1 Phase 2 Phase 3 Phase 4

• Establish audit committee charter

• Establish internal audit charter/mission statement

• Internal audit policies and procedures

• Management/board reporting

• Establish resource needs for department

• Audit universe identification/ development

• Develop audit universe risk model/weightings

• Assess enterprise risk• Overall internal audit

plan development

• Review business processes

• Assess entity level risks and controls

• Customized risk-based audit program development

• Execution of risk based audit programs

• Assessments of internal control effectiveness

• Develop value-added recommendations

• Issuance of internal audit reports

• Obtain management responses

• Perform follow-up activities to assure commitments are met

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Ron Steinkamp, CPA, CIA, CFE, CRMA, [email protected] Profile: www.linkedin.com/in/ronsteinkamp

Visit our website, follow Brown Smith Wallace on LinkedIn and Twitter or Like us on Facebook!

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mailto:[email protected]

http://www.linkedin.com/in/ronsteinkamp

bsw value of muni audits

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