Overview of the State Auditor’s Office
Table of Contents
Background ...... 3
Audit Authority...... 4
Organization ...... 5
Vision, Mission, Goals ...... 6
Continuous Improvement ...... 7
Audit Types ...... 8
State and local audits ...... 8
Audit approach ...... 10
Identification of audit issues ...... 11
Audit dispute process ...... 11
Performance audits ...... 12
Who pays for audits ...... 13
Quality assurance program...... 14
Who audits the Auditor? ...... 14
Appendices ......
2 Background
We work with our audit clients and citizens as an advocate for government accountability. As an agency led by an elected official, the State Auditor's Office has the independence to objectively perform audits and investigations. Our audits are designed to comply with professional standards and to satisfy the requirements of federal, state and local laws and regulations.
We audit nearly 2,400 local governments, from the smallest mosquito district to King County. We also audit more than 160 state agencies, boards and commissions and colleges and universities.
These audits examine financial information and compliance with state, federal and local laws and requirements. We investigate fraud and whistleblower cases and referrals from our citizen hotline. We also conduct performance audits of state issues and agencies and local governments.
We take our role as partners in accountability seriously. Through our client support program and Local Government Performance Center, we provide information that helps governments and agencies improve operations.
3 Audit Authority
The State Auditor's Office is established in the state's Constitution as part of the executive branch of state government. The primary authority for the Office is found in Chapter 43.09 of the Revised Code of Washington. Citizens elect the State Auditor to four-year terms. Article III, Section 20 of Washington’s Constitution states “The auditor shall be auditor of public accounts…”
State law (RCW 43.09 and RCW 43.88.160) give the State Auditor the authority to audit financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education.
The State Auditor is also specifically required to perform certain audits including: Annual audit of the state’s financial statements (RCW 43.09.310) Annual financial statement audit of the Worker’s Compensations Program (RCW 51.44.115) An examination of the financial affairs of all local governments at least once every three years (RCW 43.09.260) Audit of individual health and welfare benefit plans or self-insurance programs at least once every two years (RCW 43.09.260) Annual financial statement audit for all joint property and liability self-insurance programs (WAC 82-60-060) Annual financial statement audit for all joint health and welfare self-insurance programs (WAC 82-65-090).
Further, the State Auditor prescribes the uniform system of accounting and reporting that all local governments must follow (RCW 43.09.200).
4 Organization The Auditor’s Office has these divisions and teams:
Local Audit (Financial and accountability audits of local government, citizen hotline, local government data collection and support, local government budget and reporting manual).
State and Performance Audit (Financial and accountability audits of state agencies, boards and commissions as well as performance audits of state and local governments, and the Local Government Performance Center). Special Investigations (fraud and whistleblower programs) Audit Support and Quality Assurance (quality assurance, audit policies and guidance, technical assistance and training, TeamMate (audit documentation software) administration and support). Administration (human resources, financial services, information services, strategic planning and performance management). Communications (media strategy and relations, report and other publication writing and editing, spokesperson for Office). Legal Affairs (legal analysis, interface with state Attorney General’s Office, public records). Legislative Relations.
Our approximately 400 employees work from 15 locations around the state, allowing us to deliver services effectively and efficiently. Offices are located in Olympia, Bellingham, Bellevue, Everett, Kent, Olympia, Port Orchard, Pullman, Seattle, Spokane, Tacoma, Tri-Cities, Vancouver, Wenatchee and Yakima.
About 38 percent of our staff are certified public accountants or hold other certifications and advanced degrees.
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Vision, Mission and Goals Our mission
The State Auditor's Office holds state and local governments accountable for the use of public resources.
Our vision
Government that works for citizens.
Our strategic goals
1. Government that works better, costs less, and earns greater public trust.
2. High audit quality and operational efficiency.
3. Highly skilled, engaged and dedicated employees.
Continuous Improvement Efforts
6 The State Auditor’s Office has been utilizing Lean improvement tools and techniques to build a culture of continuous improvement since 2013. Recently, we appointed a full-time Lean Coordinator, trained more than 20 green belts, have three black belts on staff, and embedded Lean Champions on all 28 teams across the state. To date, we have completed 11 projects with a savings or gains of: Reduced HelpDesk requests by 61 percent Decreased the time spent by Audit Management to track audits by more than 50 percent Increased LGFRS data accuracy by 10 percent (exceeding 5 percent target) Streamlined the 50 step performance audit process down to eight deliverables Empowered teams to “fix what bugs them.” Examples include: o The Whistleblower team evaluated the intake process and went from XX outstanding cases taking from x-x years to complete to all new cases completed within our 1-year statutory deadline o The Tri-Cities team stopped calling all entities that had a federal audit, which took up to three months to complete, and now send a bulk email asking if they need a federal audit. They’ve had more than 50 percent response with an answer in the first week and a 99 percent response within a month. You can find more detailed information about our strategic plan, operational plan, and performance measures, in Appendix A.
7 Audit Types
The following types of engagements are performed in State and Local Audit:
Accountability Audits – We conduct accountability audits to meet our statutory requirement to examine all local governments’ financial affairs at least once every three years. Our objective is to detect and report on significant misappropriation, misuse or loss of public funds and non-compliance with laws and regulations, contracts and grant agreements relating to financial matters. We also identify and report on weaknesses in internal controls governing financial operations.
Assessment Audits for the Smallest Governments - For small local governments, our Office conducts limited-scope assessment audits using information from the client’s annual report and other requested information. This work is done off-site to help minimize audit costs. However, on-site follow-up work may be done based on auditor judgment. We define small local governments as school districts with no high school or less than 100 full- time students and other local governments with $300,000 or less in annual revenues.
Federal Program Audits (also known as Single Audits) – The State of Washington and local governments that spend at least $500,000 in federal financial assistance annually are required to obtain an audit pursuant to the federal Single Audit Act of 1984. We provide that service on behalf of the federal grantor agencies. We perform one single audit for Washington State, referred to as the Statewide Single Audit (SWSA); and separate single audits for each local government required to have one. These audits are performed in accordance with Generally Accepted Government Auditing Standards and are an assessment of internal controls over federal programs, tests of how those controls are working and tests of compliance with federal requirements.
Our objective is to determine whether a client complied with federal compliance requirements that could have a direct and material effect on a major federal program and to report on noncompliance
Financial Statement Audits – We perform financial statement audits to determine if the State and local governments’ financial statements are accurate and complete. Our audits provide users with an independent assessment of their financial positions and the results of their operations and cash flows.
Our objective is to provide an opinion about whether a client’s financial statements are presented fairly in all material respects in conformity with applicable financial reporting requirements. Reporting on financial statement audits performed in accordance with Government Auditing Standards also includes reporting on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts, and grant agreements that have a material effect on the financial statements.
Fraud Investigations – Under the guidance of Special Investigations our audit staff frequency perform fraud investigations. Our objective is to investigate and report on known or suspected losses of public funds or other illegal activity and to fix responsibility for the loss.
Citizen Hotline Referrals – Our objective is to examine concerns from citizens about governmental waste, inefficiency and abuse.
8 Attestation Engagements – Our objective depends on the users’ needs and can cover a broad range of financial or nonfinancial objectives about the subject matter or assertion. Attestation engagements include examinations, reviews, and agreed-upon procedures, which provide different levels of assurance. For example, audits of passenger facility charges in ports, audits requested by the school safety net committee and I-937 (energy independence) compliance audits.
Please see Appendix B for a snapshot of local audits conducted in 2014 and 2015
9 Audit Approach
Entrance conference This meeting happens at the beginning of the audit, after we have completed our audit planning. We will talk with the entity about the areas we will be auditing, audit timing, the expected cost, and the staff who will conduct the audit. The entity will have an opportunity to discuss specific areas they would like us to examine.
Gathering audit evidence Although each audit is unique, we routinely ask for the minutes of council, commission, or board meetings; the final version of financial statements; and access to relevant accounting personnel. The auditor will identify any additional items needed. We will bring issues to the entity’s attention as they are discovered during the course of the audit.
Exit conference This meeting happens roughly two weeks following our final day of fieldwork. During this meeting, we share our preliminary conclusions, listen to the entity’s responses, and answer questions. We will also discuss when we expect to issue our reports and when we expect to return for our next audit.
Please see Appendix C for materials entities receive at the various stages of their audit and our related audit policies.
Use of Outside CPA Firms SAO allows the reliance on the audit work performed by external auditors that contract directly with state agencies and local governments. Currently, fewer than 90 local governments utilize an outside CPA firm to conduct the financial audits. Our Audit Policy 3510 – Use of External Auditor’s Work, requires the evaluation of the independence and professional reputation of the external audit firms. Additional we review the audit report and documentation of external firms to determine if they meet professional standards. In order to ensure audit work performed by other auditors meet professional standards, our auditors use an External Auditor Financial Statement Audit Review Checklist. You can find the audit policy and checklist in Appendix D.
10 Identification of Audit Issues
Audit standards, as well as the audit guidance we have prepared for our audit staff, require our audit results to be based on sufficient and reliable evidence, require supervisory reviews of that work, and require our audit staff to use professional judgment in planning and performing audits and reporting the results. They also require us to communicate any significant issues we are finding during the audit with management and the governing body.
Audit issues are presented to governments in one of three levels depending on the significance of the issue:
1. Finding A finding is the most serious level of reporting an audit issue. Under auditing standards, significant deficiencies and material weaknesses in internal controls, misappropriation, material abuse, and instances of material noncompliance must be reported as findings. Those findings are included in our audit report, which is released to the public at the completion of our audits. Governments are provided an opportunity to respond to audit findings in writing and these responses are included the audit reports.
2. Management Letter item Management letters are addressed to management and the governing body to communicate control deficiencies, noncompliance, or abuse that are important, but that do not rise to the level of a finding. Management letters presented to them at the completion of our audit. We do not release management letters to the public but they are public records and we release them upon request. Management letters are referred to, but not included, in the audit report.
3. Exit Items Exit items are more minor audit issues we present to management at the completion of the audit to assist them in improving operations.
Audit Dispute Process The Washington State Auditor's Office (SAO) is committed to effective two-way communication during the audit process, so that audit clients are informed early on of any significant issues identified during the audit. The significance of those issues—and the conclusions and recommendations related to them— reflect the auditors' judgment based on the documentation and other evidence reviewed during the audit and on applicable requirements in law, contracts, grant agreements, or audit standards.
The auditors' exercise of professional judgment may lead to disagreements with the audit client. In many instances those disagreements can be resolved during the audit because either the auditor or the audit client is able to provide additional clarification, documentation or information to substantiate their assertion.
If the client continues to disagree with SAO's preliminary assessment about the significance of audit issues or how they will be reported, SAO provides multiple opportunities before the audit is finalized for the audit client to provide additional evidence, information or explanation in support of their position. This process, which is consistent with government auditing standards, is outlined in our Audit Dispute Process (see Exhibit E).
11 Performance Audits Washington voters authorized the State Auditor’s Office to conduct independent, comprehensive performance audits of state and local governments. Citizens’ initiative 900 (“I-900”) was enacted into law in 2006.
The law directs the Auditor’s Office to “review and analyze the economy, efficiency, and effectiveness of the policies, management, fiscal affairs and operations of state and local governments, agencies, programs and accounts.” Performance audits are to be conducted according to government auditing standards set forth by the U.S. Government Accountability Office.
Initiative 900 requires that the state Legislature or corresponding local legislative body hold at least one public hearing within 30 days of the issue of a performance audit report. For audits of state agencies, we present the results of our audits at hearings held by the Joint Legislative Audit Review Committee.
In the 10 years since performance authority was granted, we have issued 79 reports and 1,841 recommendations. Those audits have identified $1.3 billion in potential savings and increased revenue, and numerous improvements in performance and service to citizens. Agencies have implemented 86 percent% of our recommendations and reported over $1 billion in actual savings and revenue as of June 2014.
Cost per hour
Unlike state and local audits, performance audit costs are not charged to the client. Therefore, we do not have a “billing rate.” However, we do estimate our cost per audit hour as a tool for controlling our costs. For 2015, we estimated each audit hour cost $160. We estimate cost per audit hour by dividing total costs by the number of direct audit hours.
Transfers to other funds
The 2011-2013 budget transferred $9.7 million in anticipated revenues from the performance audit fund to other state government functions in social services and tax collection. This trend continued with $9.8 million transferred during the 2013-15 biennium, and another $12.6 in the 2015-17 biennium.
12 Who pays for audits?
The Municipal Revolving Account (MRA) pays for audits of local governments. The State Auditor’s Office bills local governments for the cost of financial, single, and accountability audits and fraud investigations. Our billings consist of an hourly rate ($93/hr), plus travel expenses. In addition, the account pays for the Budget, Accounting and Reporting System (BARS), which are the financial business rules used by municipalities. The MRA also funds the state’s local government financial reporting system. The funds are restricted for payment of expenses related to these audits and investigations.
The Auditing Services Revolving Account funds the audits of the state’s Comprehensive Annual Financial Report, the annual audit of compliance with grant requirements for billions in federal money the state receives each year, the state-employee whistleblower program and fraud investigations and accountability audits for state agencies. The State Auditor’s Office bills state agencies for this audit and investigative work. The funds are restricted for payment of expenses related to these audits and investigations.
The Performance Audits of Government Account pays for performance audits of state and local governments as well as the Local Government Performance Center. This money comes from a small percentage of the sales and use tax (0.16 percent) that is placed in a dedicated account for the State Auditor’s Office.
The School Programs Account is a general fund appropriation from the Legislature that pays for our audits of school districts to ensure they are properly reporting student enrollment, teacher education and experience and student transportation to the Office of Superintendent of Public Instruction. Districts receive a large portion of their funding based on this reporting.
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Quality Assurance Program
Our Audit Support team is responsible for the following: Quality assurance: Provide an on-going program of assessment and monitoring of audit quality and adherence Audit policies and guidelines: develop and maintain audit policies, guidance and tools for audit teams. Technical Assistance and Training: Provide technical support and training for our Office and as a service to local and state governments. TeamMate Administration and Software Support: Administer our Office’s audit management software and provide technical software support for audit teams.
Please see Appendix F for more details on our internal quality control policies including independence, ethics and conflict of interest. Who audits the State Auditor’s Office? The State Auditor's Office receives external peer reviews every three years to ensure our audits satisfy government auditing standards. Those reviews are administered by the National State Auditors Association.
We have passed all our peer reviews. Our most recent peer review was in 2013. A team of 10 auditors from across the country performed a comprehensive review of our audit policies, surveyed staff, tested CPE and independence records, and reviewed a cross-section of audit reports. We received an "unqualified opinion,” which is the highest level of assurance an external review team can give on a system of audit quality control. These reviews also provide insights on how to improve our audit work and documentation. Our next peer review is scheduled for September 2016. Please see Appendix G for more information about our peer review process.
We also are audited every two years by a certified public accounting firm under contract with the Office of Financial Management. This audit examines our fiscal operations and compliance with state laws and regulations. You can find this audit in Appendix G
State law also requires a regular performance audit of our Whistleblower Program. Since those audits began in 2006, they have reported no findings.
While peer reviews and audits are critical tools to assess the quality of our work, we also want to know what our audit clients think. We conduct a customer satisfaction survey after each audit engagement. Please see Appendix H for the results of our customer survey conducted in 2015.
14 Appendix A
15 Appendix B
16 Appendix C
17 Appendix D
18 Appendix E
19 Appendix F
20 Appendix G
21 Appendix H
22 Appendix I
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