Definitely about outliers

I have always been an outlier. From a small town and yearning to be in a city. Coming from an environment that was fairly conservative, but having ideas that were not. Entering the world of art, but not fitting in. Moving on a career path that is not a straight and logical course but one with sharp turns and bumps. But definitely an outlier.

I am working on an audit right now that is also about outliers. But we are looking for outliers because this will provide evidence to evaluate whether management has done its job. What is managements' job? Is it managements' job to make employees all conform?

The real measure for an employer is the quality of the work. Employees may have differing work styles but the work quality may be worth accommodating those styles. That is why an audit should focus on effect. If accommodating different styles does not create a negative effect or actually increases effectiveness, than auditors should be tolerant of outliers in their analysis.

Outliers can also be a symptom of a problem that needs to be addressed. Rather than try to control the outlier, management instead should use it as information about organizational health. When an auditor finds this type of outlier, she can use the information to describe the effect of an organizational problem. Recommendations then would focus on the real problem, not employees who are outliers.

Truly strange

I have worked as a local government auditor for three different governments for the past nineteen years. Governments always struggle with the administration and management of contracts. Every audit that examines contracting always will find room for improvement. But this is as bad as it gets. Jefferson County, Alabama is unable to determine how many contracts it has that are current. Lacking adequate controls, they also don't have a contract compliance officer or an internal auditor. Faced with a budget crisis, the local County commissioners don't have accurate information to make decisions.

But even stranger, this news account, just four days later describes another crisis in the city of Birmingham, Alabama, the County seat. The City Council is requesting an audit from the Alabama State Auditor's Office to determine how much money the City has in the bank. The mayor claims the City will end the year with a $13 million surplus, but the City's financial accounting software shows the City is running a deficit.

Two great audit areas - contracts and the accuracy of financial information.

It's the road map thing again!

Two reports have come out recently at the federal level that illustrate one of the biggest weaknesses I have found in government during my career. First, the GAO has issued its second audit on the Troubled Asset Relief Program (financial bailout). I wrote about the first audit here. In summary the audit concludes the Treasury Department should increase efforts to monitor how the financial institutions are using program funds and more clearly articulate and communicate a strategic vision for the program.

The second report is from testimony to the Commission on Wartime Contracting. This Commission is mandated by Congress to study federal contracting for wartime reconstruction and performance in Iraq and Afghanistan. This was after the hard lessons learned in Iraq. In news coverage the deputy special inspector general for Iraq is quoted as saying, "Before we go pouring more money in, we really need to know what we're trying to accomplish" (in Afghanistan)."

It's the road map thing again! The hardest work in solving a problem is establishing the direction you want to go. This includes establishing guideposts, a clear direction to the location you want to arrive at, and a way of knowing when you get there. In almost every audit I've worked on we have findings about lack of clear strategy and performance measures. It's not that management doesn't know that these are important. I think its the lack of resources assigned to these activities. When you're trying to solve a problem, its difficult to spend resources that are indirectly related to that problem. But, again, if you know where you want to go and you have a map to get there, why drive with your eyes closed?

Tone at the very top

I've written before about tone at the top, here and here, and how important it is. No matter how many rules are written, the bottom line is people. The people that do the work, from top to bottom, must be committed to ethical behavior. I believe it is in the nature of people to act ethically, but if the leadership creates a climate that does not encourage that behavior, then actions tend to drift to the margins.

Our new president, Barack Obama, took actions in his first days that signaled the new tone at the top. If you look at his first ever, yes first, executive orders and memoranda you see how the tone has changed. On the Freedom of Information Act he issued this statement, "The Freedom of Information Act should be administered with a clear presumption: In the face of doubt, openness prevails. The Government should not keep information confidential merely because public officials might be embarrassed by disclosure, because errors and failures might be revealed, or because of speculative or abstract fears." On transparency he states, "My Administration will take appropriate action, consistent with law and policy, to disclose information rapidly in forms that the public can readily find and use." He also signed several order regarding interrogation and detention of terrorists that puts us back into ethical behavior.

Thank you!

Moving quickly and internal controls

I'm reading the GAO report released yesterday about the bailout. Several things jump out. "However, the rapid pace of implementation and evolving nature of the program have hampered efforts to put a comprehensive system of internal control in place." and "While OFS and PricewaterhouseCoopers are working to implement a comprehensive system of internal control, until such a system is fully developed and implemented, there is heightened risk that the interests of the government and taxpayers may not be adequately protected and that the program objectives may not be achieved in an efficient and effective manner." I know in a crisis you can't wait to act but protecting assets is also important, particularly when they are public assets at risk.

So far there is no system in place to monitor compliance of the financial institutions that receive aid. Institutions told the auditors that they intended to use the funds consistent with the goals of the bailout but stated that they would view this capital as no different from their other capital. Most institution officials noted that money is "fungible" and that they did not intend to track the funds received separately. The audit further notes that strong organization of the Office of Financial Stability will be critical. The OFS is relying on contractors and financial agents in the private sector which the audit notes will enhance flexibility but also requires oversight and protection against the risk of conflict of interest. Acknowledging that less than 60 days have passed since the bailout was created, the audit strongly urges the quick implementation of internal controls.

This echoes many local audits that I have been part of over the years. Certainly not of the magnitude and significance of this program, still they included the lack of planning about ensuring how goals will be accomplished. It is not enough to have a plan to address a problem. Government must also have a plan to ensure that the plan is implemented efficiently and effectively. That plan is one of internal controls. It's like planning a trip with a map but driving with your eyes closed.

Audit of the Bailout

I look forward to reading this. I'm impressed that we'll get this information so quickly.

Update to Sex, Drug Use and Graft

Update to a recent post. The Oregonian now has an editorial relating to the audit report that was issued last week.

Sex, Drug Use and Graft! and Tone at the Top

The importance of the auditing function has been in the news several times this week, at least at the federal level. The inspector general of the Interior Department testified before the House on September 10th. He accused high-level officials of tolerating ethical failure and allowing such things as cronyism to cover-ups of incompetence. The NY Times ran an editorial on September 11th titled "Anything goes, apparently."

One of the important things that has evolved in auditing, especially after many of the large ethical failures, is the interest in an audit to address tone at the top. Nothing is more critical to an organization than to have explicit ethical standards that are publicized, reinforced, and followed by all from the top to the bottom. Without that an organization runs the risk of having a situation where "anything goes."

Why it's important to create good measures

Great guest post on NYTimes Feakonomics blog. Not only does it talk about performance measures that cause public policy to misdirect resources and efforts, but also touches on how systems can be just as important as building infrastructure.

It's all about control

When I first started auditing I was put off by the auditing standards because they talked about internal controls and how auditors were to assess their effectiveness. The terminology was alien to me and I had trouble grasping the concept. Coming from a research/evaluation perspective, it just didn't make sense. But after a few years I realized that when an evaluator assesses the processes that a program uses to deliver the service, she is actually looking at the controls.

Government services are designed to resolve a problem or generally improve the quality of life for its citizens. Officials can't just spend money and hope for the best. They are accountable to the citizens who entrusted them with public dollars. Controls could be information, evaluation, feedback - anything that tells a manager or leadership that something is wrong and needs to be corrected. Controls are also the processes that ensure resources and assets are protected, such as software security or limiting access to financial resources.

But auditors deal with an additional type of control. Audits shine a light on a program and provide information. For many managers, that is giving up "control." Over the course of my career, I have encountered many responses to audits from fearless openness to closed obstructionism. Working through that is also part of the auditor's job. You have to keep your eye on the prize - improving government.

Procedures

Auditors are interested in process and procedures. Not that every action must be extremely detailed in writing. But that the process used was thoughtful and careful. Government should be held to a higher standard. After all, the resources we use belong to the citizens who trust us to use them wisely.

When I first started auditing I heard a lot about "pass-through" dollars. This was funding that was received from the state or federal government and was contracted out to non-profit services. There seemed to be little understanding that even though these were not dollars derived locally, they were public dollars, and that there was still a responsibility to manage their use well.

Negotiating and signing a contract for services is not all that must be done. Steps must be taken to ensure that the money was well spent. In a recent audit my office completed, we found that the scope of services was described very well and that the competitive process was strong. But the program neglected to plan for how to ensure that the agency received what was paid for.

It seems that when government responds to a crisis or takes on large projects, process breaks down. Here is a audit by Louisiana State Auditors of the emergency response to Katrina. The audit found that Louisiana could have saved millions of dollars if it had directly contracted with staff needed to monitor debris removal and manage grants from FEMA. Instead a consultant was hired who then subcontracted out these services at a 100% mark-up. Granted this was an extraordinary event and there was probably little experience or planning for something of this magnitude. But if the recommendations are followed, it will improve the reponse in the future.