Structural Reform: Auditing
Entrepreneurs in the private sector often hire consultants to advise them on how best to streamline operations and deliver goods to market as efficiently as possible.
Public-sector entrepreneurs who direct charter agencies1 could benefit from similar advice. The state of Nevada can ensure such valuable support for its new charter agency directors by empowering the state controller with a broad mandate and sufficient funding to conduct performance audits at state and local levels.
Key Points
Auditors should always remain free of political influence. Currently, the only state auditing offices in Nevada serve at the pleasure of incumbent politicians. The Audit Division of the Legislative Counsel Bureau is directly subordinate to legislative leadership while the Department of Administration’s Division of Internal Audits is ultimately subordinate to the governor.
This subordinance compromises auditors’ ability to choose which government agencies or functions should be reviewed as well as the integrity of their findings – which become subject to potential suppression by interested politicians. For this reason, state audit functions should be consolidated into a single office with independent electoral accountability.
Performance audits are different than financial audits. Financial audits merely review and reconcile accounting statements and practices without evaluating the relative effectiveness of each spending item. Performance audits go a step further by identifying the organizational structures and spending practices that would achieve optimal results.
Performance audits can identify substantial cost savings while simultaneously improving performance. In 2005, lawmakers in the State of Washington expanded the powers of that state’s independent auditor to conduct performance audits for all state and local governments. In 2012, the office also launched a dedicated Local Government Performance Center. Within its first 10 years, the office conducted 30 performance audits and conducted reviews of more than 80 state and local governments, programs and services.
State and local governments in Washington reported saving over $1 billion as a result of implementing the performance auditor’s recommendations since the first performance audit was published in 2007. The office estimated that every dollar spent on performance audits resulted in $16 in savings. What’s more, the auditor’s advice has been accepted with enthusiasm, as 86% of recommendations were fully or partially implemented.2
Performance audits are a natural complement to charter agencies. While a performance audit can be valuable to any organization, the organizational structure of charter agencies especially aligns the incentives facing agency directors with those of lawmakers and taxpayers. When agency directors and their employees see a direct financial benefit – and not a loss – as the result of increased cost-effectiveness, they have every motivation to actively solicit and aggressively implement the recommendations of performance auditors.
Recommendations
Extend a mandate and sufficient funding to the state controller to conduct performance audits. Existing auditors’ offices in the legislative and executive branches could be consolidated with the controller’s office and used to conduct performance as well as financial audits.
The controller should gain explicit authority to conduct performance audits for any state or local government. Local government expenditure in Nevada has historically been a more significant component of public spending than state expenditure. Therefore, while performance audits of state agencies are valuable, the financial impact could be far greater if the controller also examines local government operations.
1 See “Structural Reform: Charter Agencies.”
2 Washington State Auditor’s Office, “Annual Performance Audit Progress Report: Report No. 100777,” December 2014.
