Tavares, FL - March 15, 2011 - Opinion (updated slightly at 3pm)
I have reached the point where I have no confidence in a major oversight feature of Lake County Government.
Most readers know I have a long background in internal audit in large corporations, local government (County of Los Angeles) and Federal Government (anti-corruption adviser in Iraq).
Some observers claim I only look at Lake County functions from an audit standpoint. They confuse the function of financial auditors and their audits of County financial reports with the function of internal audit, which expands on financial audits to cover efficiency, effectiveness and economy of all operations. The work of internal auditors cover all the areas that CPA's ignore, like cost accounting, performance measurement, management controls and measuring effectiveness. Most financial auditors are CPA's and follow a very regimented, regulatory process, while operational internal auditors work in an unstructured field where anything can happen and must be reviewed and where the risk of unacceptable losses, and procedures needs review.
In my opinion, a well running government agency depends upon five areas of oversight because government is a monopoly, so the discipline of price competition that exists in the corporate world is absent in government, and more oversight is needed to prevent fiscal fiascos.
Those five pillars of good government oversight are:
1. Good management, including
- Running up $1-million in overtime expenditures in the Fire Dept. without detection...
- Failure to budget for a contracted requirement for $1.5-million in maintenance fees for a first responder radio system...
- Failure to prevent or detect a rogue manager from instructing a contractor to provide $600,000 in services without any approvals...
Good managers would have formal, monthly, printed reports and contract administration processes to detect and prevent the above, but the County apparently did not. When I used a public records request to ask for departmental performance reports that might be discussed at weekly or monthly Director meetings held by the prior County manager, there was only one department that had any written performance reports. Thus, all communication was verbal or maybe with presentations, but not using a formal, disciplined management reporting system to detect variances from expected spending and performance standards.
2. Good Controllership oversight - using an experienced controller to review processes and devise formal procedures to prevent the above fiscal fiascos. Lake County has no such person. The County Clerk does their accounting, and when asked, their Chief accountant said she did not have controllership responsibility for the County - she provided the accounting systems, and reporting systems, but not the oversight, which was left up to individual department managers. Additionally, the prior budget manager was asked if he had that responsibility and he said no. In my opinion, budget staff have no experience in controls, audits or devising procedures to prevent fiscal fiascos. So, Lake County has no controllership oversight, which is a big vacuum. In some organizations, they use experienced operations managers or COO's (Chief Operations Officer) to fill this need and devise the operations procedures to reduce fiscal problems. The KEY is that there should be a central function to manage and review management and operations reports to ensure that performance metrics are met, and variances like excessive overtime are detected when they are small. If a good, central management control system is in place, big variances, unauthorized spending, and other fiscal fiasco possibilities are reduced. Right now, it seems that individual managers run their own show without management oversight and then if a fiscal fiasco occurs, the manager is fired. A better, central management control system would reduce or eliminate huge mistakes and the need to fire people as a reactive result.
3. Public oversight - Only 2-3 people, including this author, spend time reviewing and challenging spending processes. One person, Lee Johnson, wrote an extensively researched report on problems with hiring and firing, and also the SHIP program, and he was ignored by the Board, and then it took almost two years for the issue to finally be the subject of an internal audit report.
4. Oversight provided by the "Fourth Estate" - aka the press - Unfortunately, the Daily Commercial refuses to do any investigative reports on local government, preferring to only publish "happy news". As for the Lake Sentinel, the only oversight by journalistic investigation is provided by a single columnist, Lauren Ritchie. Additionally, there is this blog, FiscalRangers.com and another blog, the "Right Side of the Lake" which has a bias towards development priorities. That is not enough.
5. Internal Audit - Over the past three years, the "internal audit" staff of the Court Clerk, which has internal audit responsibility for BCC and the Court Clerk, has refused to post any audit reports of either the Court Clerk or the BCC operations on a website. The Court Clerk also cites a single court case as a reason not to initiate any internal audits of BCC operations without formal approval from the BCC Board, which rarely was implemented. Thus, in the past year, after the earlier, very capable audit director left, a new, inexperienced CPA was hired as the new Director of Internal Audit, and not one audit has been conducted over the BCC operations or published in the year since he was hired. No audit reports at all are posted on the internal audit website, and the only document, an audit plan for 2010-2011, lists 12 BCC "audits" that are almost all "follow up" reviews of prior audits. Such follow up reviews should not take more than 2-3 days each, so why so little work?
A major concern of this author is the need to conduct an operational (not financial or compliance) audit of the $50+million judicial center construction. Already it is under process and NO INTERNAL AUDIT WORK HAS BEEN completed or reported in public. I have explained to the prior audit director, the current audit director and the County Clerk the importance of a "front end" review of the contract and construction processes to detect and prevent improper processes and payments. In contrast, the School District did start such audits in 2008 based upon my discussions when I was on their Audit Committee. One of the first audits detected a $7-million issue which is still in litigation. Their audit director, also a CPA and not a Certified Internal Auditor, left the audits up to an external audit firm. Recently that firm conducted a higher level contract terms review and detected MANY areas where possible overpayments could take place due to poor contract terms.
This is why the County needs good internal audit oversight. Not only for the reason above, but internal audit is the last control to offset the lack of oversight in the other areas mentioned above. If the other controls do not work well, then internal audit is more important.
However, I no longer have confidence that adequate internal audit oversight of BCC operations is possible from the County Clerk. The Board needs to establish an independent audit or finance committee to implement all the oversight functions discussed above, plus engage an outside forensic or internal audit firm to provide internal audit services.
Here are the reasons why I have no confidence in the Court Clerk's internal audit capabilites, which internal auditors call "red flags":
- The Court Clerk has refused to publish audit reports on the website, even older ones.
- The Court Clerk is using the excuse of a single court case to halt initiation of any audits of BCC.
- The Court Clerk's office took over a year to audit the SHIP program, which detected many improper practices, and was based upon extensive written reports by an outside citizen, not their work. The same issue applies to a separate review of the Personnel department and hiring and firing practices.
- The Court Clerk provides accounting services to BCC, so there is a conflict of interest, and when there is no complete controllership oversight of BCC operations, there is even more of an oversight weakness and conflict.
- The Court Clerk's chief of accounting is married to the County Attorney, who was the interim County Manager during the last year when the County Clerk's audit department did not conduct any audits.
- Finally, using public records requests, this author found that the Court Clerk's internal audit Director was hired without any public, competitive hiring practices, but was hired directly by the Court Clerk, AND the hired internal audit director is the SON-IN-LAW of the prior Court Clerk, James Watkins. Additionally, I found that another Watkins relative, his brother, was also hired as a director without public notice. Nepotism is a HUGE red flag to an experienced internal auditor, and these are examples.
Conclusion:
All the above are "red flags" that lead to my concerns, and indicate that the County Board needs to take action to improve oversight credibility for BCC operations. If the Board does not take action, then their personal reputations are at stake when the next fiscal fiasco occurs due to weak oversight.
Recommendations:
The County Board should
- Establishm an independent audit or finance committee charged with planning and implementing oversight methods listed above, including improved management and operating control systems, controllership oversight and independent internal audits of operations. Unlike the School Board audit committee, which is mostly CPA's, I recommend that most members be experienced industrial controllers or managers from industrial firms like those that were on the recent economic development panel.
- Hire an outside operational audit or forensic audit firm able to provide high level internal audits (not financial audits) based upon a risk analysis and audit plan developed by the audit or finance committee.
Without the above actions, the County may continue to have fiscal fiascos and their credibility and personal reputation for handling public tax funds will be reduced.
Vance Jochim
www.fiscalrangers.com
former Certified Internal Auditor, Certified Fraud Examiner and Certified Information Systems Auditor.
