The AGA Weblog

Why Audits Fail

By: David R. Hancox, CGFM, CIA

David R. Hancox, CGFM, CIA, is director of State Audits in the New York State Comptroller's Office and on the faculty of Siena College. He is the co-author of two books on auditing and is a past president of AGA’s New York Capital Chapter, a Regional Vice President and a member AGA’s Financial Management Standards Board and its Emerging Issues Committee.

The auditing profession faces serious challenges that all of us in the accountability profession must confront and help solve.

In March 2003, the Department of Interior’s inspector general audited the Minerals Management Service’s (MMS) audit offices and discovered an organization challenged by both management and control issues. MMS auditors were responsible for monitoring the annual collection of $6 billion in royalties and fees for minerals produced from federal and Indian lands. In 2008, The IG found pervasive misconduct at one of the program offices. Nearly one-third of the 55-person audit staff accepted gifts and gratuities from oil industry officials with whom they did business.

On Sept. 14, 2008, Lehman Brothers filed for bankruptcy protection. It was the largest company failure in history—far exceeding WorldCom’s, the previous largest business failure. As of Nov. 30, 2007 though, the auditors were saying everything is fine—Lehman got a clean opinion on internal controls and on their consolidated financial position—despite the requirements of SAS 59 that auditors consider an entity’s ability to continue as an ongoing concern.

Repeatedly, auditors have failed to find the significant problems in organizations. According to the SEC, HealthSouth Corp., one of the nation's largest health care providers, overstated its earnings by at least $1.4 billion. As reported in the Wall Street Journal, Michael Vines, a bookkeeper in HealthSouth's accounting department, tried to alert outside auditors and others to the questionable practices in his accounting department, but his concerns fell on deaf ears.

Why aren’t we listening?

We haven’t been listening for years. In the famous Equity Funding fraud uncovered in 1973, the auditors didn’t detect 64,000 phony transactions with a face value of $2 billion, $25 million in counterfeit bonds, and $100 million in missing assets. What does this say about the competence of the auditors or of the credibility of the audit profession?

I’m convinced the auditing profession needs to rethink the way it does business if it is going to find the problems that exist in organizations and meet the needs of its stakeholders. Several challenges need our attention.

Auditor Independence
Most auditors argue that they are independent, but often that independence is impaired by a variety of factors that limit the ability to "call it like it is."

The decision to maintain a client because of the revenue the client's business can generate represents a subtle, but pervasive potential conflict of interest. It is a threat to auditor independence that afflicts all too many public accounting firms. It is a conflict inherent in the system we use to hire auditors.

Our independence also is affected when we allow management to sit in on interviews of agency staff or when we allow agency management to pull existing records from the files without the auditors being present. I have heard from auditors who say they are required to allow management extended time periods to pull records needed for the audit. When this happens, the auditors might as well pack up their bags and go home. Such a situation allows management to cull the records, add data that didn't exist, clear out data that is harmful, and generally sanitize the information going to the auditors.

Assessing Internal Controls
Auditors are very good at assessing control activities—the policies, procedures and segregation of duties that exist. They are reluctant to assess the control environment—including criticizing management’s attitude, philosophy, operating style and competence when necessary. Yet, most major frauds can be traced to the lack of a good control environment—not the lack of control activities. When management overrides the system of control, organizations can fail.

Although the nature of NASA's Columbia disaster and the WorldCom scandal were quite different, the root cause of each—the control environment—was remarkably similar. These events weren't caused by the lack of policies, procedures or segregation of duties. The failures resulted from a flawed control environment where management chose a certain course of action, including overriding otherwise effective policies and procedures.

Auditors’ Ethics
The auditors’ ethics are just as important as the ethics of management. We should be above reproach. In an audit the New York State Comptroller’s Office conducted of an $11 million fraud in a school district on Long Island, the partner of the CPA firm doing the financial statement audit was caught altering agency records to cover up a major scandal. He was trying to protect his reputation because he had been issuing a clean opinion on the financial statements.

When nearly one-third of the staff in the Minerals Management Service’s audit offices accepted gifts and gratuities from oil industry officials with whom they did business, there is a serious problem that affects the credibility of all of us in the accountability profession.

Verifying Transactions
We should never forget the basics of our profession. As we become more technologically proficient, it is easy to think of assets in terms of bits and bytes on a computer. Failing to verify the existence of an asset has been at the heart of many frauds that auditors missed.

In the Equity Funding case, auditors missed the ongoing fraud because they did not follow the basics of auditing. Beyond analytical reviews and examining documentation, a fundamental tenet of auditing is to verify the existence of the asset. If the auditors missed 64,000 phony insurance policies, $25 million in counterfeit bonds, and $100 million in missing assets, they simply weren't doing their jobs. In today’s environment with color copiers, color printers, scanners and access to corporate logos on the Internet, it is even easier to manufacture documents.

Questions
Are we really free from personal, external and organizational impairments related to our audit work, whether government or public? Do you think we too often forget the basics of our profession including assessing controls properly? Are we always verifying the substance of the transactions we review or are we focused on documentation?

Proving Efficiency in Governmental Audits

By: Kathy Anderson, CGFM

Kathy Anderson, CGFM, is the assistant director for Communications and Coordination, Division of State Audit, Office of the Comptroller of the Treasury, State of Tennessee

Are government auditors overauditing our governments’ financial statements? If we aren’t, do we still look like we are? Do we look inefficient to others? If that is the perception, perhaps we can tackle it by accepting more risk concurrently with making some other changes to better demonstrate how efficient we already are.

Back to the basics—the acceptable level of audit risk is inversely related to the expected reliance on the financial statements by financial statement users. In other words, the less the financial statements are used to make decisions, the more audit risk we can accept. The real “users” appear to be the bond rating agencies. Management and citizens typically use other information, like revenue projections, budget documents and news reports to make their decisions. And the types of decisions made are very different from the stockholder-type situation where users are trying to determine how to invest their savings. While we are all concerned about our governments, I can’t think of too many people who have looked at a CAFR and decided to change states. Other available information seems to feed the real decision-making regarding policy issues and day-to-day financial matters. So we all need to keep the amount of expected reliance on the statements in context, and examine the amount of audit risk that we are accepting on these engagements to create more efficiency on the financial statement audits.

I’m certainly not suggesting you issue unqualified opinions without appropriate work, but we do need to stay cognizant during the planning process that the risk of fraudulent financial reporting is minimal in governments with decent internal controls simply because of the lack of motivation for the persons who prepare the financial statements. What do they have to gain from misstating the numbers? Sure there might be political pressures to adjust a fund balance figure one way or the other, and we can factor those into the equation, but the pure financial motivation and opportunity to commit financial statement fraud is usually not there in large governments with adequate controls.

We have recognized here that government is fundamentally different when it comes to financial reporting. It wouldn’t be wise, though, to fail to recognize another way government stakeholders are different. And that is expectations. Public company shareholders are often most concerned with the bottom line. If there was some loss or waste, it can be perceived as the cost of doing business. They invested in these companies for the profits and as long as the company is performing and making them money, all is well. Government citizens, on the other hand, have a much lower tolerance for fraud, waste and abuse. And they want to know about it. They did not make a decision to invest in the state—their money is taken from them without their consent each time they make a purchase or as they earn their salaries. They demand that auditors are checking for misdeeds, and when something goes wrong, they ask where the auditors were. So in any decision about risk acceptance, we have to bear this in mind.

But the financial statement audit process is intended to find material levels of these frauds and material misstatements, and quantitative materiality is so high in large governments, that it far exceeds the expectation of the citizen as to what should be looked at and examined. So do we automatically make the leap that because the citizen expects to know more than just what is quantitatively material, that we have now established that the smaller issues must be qualitatively material and audit accordingly? Is that what the CPA firms do in the states where this type of work is contracted out?

Or should we handle it differently? Should we recognize that the citizens need to know more about internal control, fraud, waste and abuse in governments, but then address that need separately—away from the financial statement audit? There is undeniably an increased level of coverage expected of the government auditor. Over the years, we have had to look at the smallest of issues and have had to expend resources to draw conclusions to meet the demands of the governing bodies for which we work. And we willingly do that work to provide the citizens the information that they need. But when we tie that work to a financial statement audit, it could make us look less efficient than our competitors. Now, now, I know that we have to obtain an understanding of internal control, and we need to consider what controls we are relying on and test them accordingly on a financial statement audit. But there is a big difference in the extent of work that we would perform when looking at the CAFR purely from a materiality viewpoint and what we would perform if we went down to the citizen or legislator expectation level.

Once we whittle our financial audit work down to the basics, we can take our remaining staff and resources and assign work using a government-wide, risk-based approach. We can look at the smaller financial risks, internal control risks, fraud, waste and abuse, and performance separately from the financials in a coordinated approach that really allows us to prove our efficiency in our financial audits and our effectiveness throughout all of our work. We can still audit the government’s financial statements at the appropriate level for the users, and concurrently provide more information to the citizens about how their government is performing.

I recognize that auditors of smaller governments with limited internal control, lower materiality levels and frequent frauds could not adopt this approach. However, for larger governments with more controls, do auditors accept as much audit risk as they should? And are they appropriately distinguishing between the financial statement work and all of the “extra” things they do to enable them to prove their competitiveness? What are your thoughts?

"Think Big! Act Courageously! Make a Difference!"

By: William Morehead, Ph.D., CGFM

William Morehead, Ph.D., CGFM, a member of AGA’s Jackson Chapter, is the chair of Accountancy, Computer Information Systems and Finance at Delta State University in Cleveland, MS. He is AGA’s National President-Elect.

Focusing on my proposed presidential theme, I want to continue the conversation from last month regarding the accounting faculty shortage and challenges in higher education as it relates to government financial management.

You may be unaware that we have an accounting faculty shortage in our colleges and universities throughout the U.S.—this problem is serious and is impacting the quality and deliverance of our accounting education programs. The AICPA has established a substantial scholarship focusing specifically on tax and audit professionals; my question to you, “How should AGA help the effort?”

The shortage of governmental accounting professors is extreme. In my 13 years of teaching at the senior college level, I have not seen one governmental accounting textbook mention AGA. We professors have challenges in obtaining quality materials for use in governmental accounting classes. Last month I proposed I would, as president, establish an AGA task force and/or work with our Corporate Partnership Advisory Group (CPAG) members to research the faculty shortage and make recommendations on ways to overcome it. We had a good response to this idea.

Following the feedback, questions and subsequent conversations with several individuals, I propose we expand the purpose of the task force to include several education issues.

Governmental accounting faculty shortage:
• Possible “bridge” programs to connect government financial management professionals to academia.
• Scholarships for interested doctoral students.
• Partnerships with CPAG members to consider endowing government financial management professorships.
Explore publishing AGA’s own government financial management textbooks and materials for classroom use:
• Consider adapting the GFM materials into governmental accounting textbooks.
• Continue improving the use of GFM materials in the classroom (at least three universities are already doing so).
• Use the CPAG research reports in the classroom (at least one university is already doing so).
• Market our existing (and new) materials to the governmental accounting faculty throughout the country.
• Discuss the preparation and use of AGA’s Citizen-Centric Reports, Service Efforts and Accomplishments reports, and performance measures in the classroom.

AGA can “Think Big” and partner with other organizations and foundations with similar goals—Advancing Government Accountability—to tackle these issues impacting our government financial management community. Such a partnership will allow AGA to “Act Courageously” and “Make a Difference” in the future of our profession through the classroom.

Tackling these items will be challenging! However, I know AGA is up for the challenge! What are your thoughts?

Transparency is the Battle Cry…Is the U.S. Government Ready to Deliver?

By: Lisa Miller

Lisa Miller is the president of Dynaxys LLC, which offers strategic and tactical accounting solutions. She was a director in the federal consulting practice of PricewaterhouseCoopers (PWC) and served in senior management positions at the Federal Savings and Loan Insurance Corporation (FSLIC) and the U.S. Department of Housing and Urban Development (HUD). She led the first U.S. government implementation of XBRL to improve legacy system interoperability.

In the turmoil that we saw last week in the financial markets, one resounding note in the cacophony of voices was the failure in transparency. Neither the private sector nor the regulators understood the complexity of what had occurred or why. Government buy-outs represent only a short-term solution. In contrast, transparency is a long-term preventive.

Markets, technology and global operations are advancing so rapidly and in so many new ways that government must take steps to understand how the markets are functioning if it is to provide effective regulation. This includes, for example, the scope of business activity, the complexities of the market operations, the roles of the various players and the risks being assumed. Data from a wide variety of sources needs to be available in ways that can quickly and easily be shared with all the stakeholders in the market, including the public—thousands of people with equal access to information, evaluating from their own perspective or the government’s.

XBRL can help the government to deliver transparency

XBRL is an international standard for automated processing of business information by computer software, cutting out labor-intensive and costly processes of manual re-entry and comparison across multiple financial systems. Computers can treat XBRL data "intelligently." They can recognize the information in an XBRL document, select it, analyze it, store it, exchange it with other computer systems and present it automatically in a variety of ways for users. XBRL enables dramatic savings in time and cost while producing standardized, accurate results that can be easily shared. Human effort can switch to higher, more value-added aspects of analysis, review, reporting and decision-making. In this way, analysts can save effort, greatly simplify the selection and comparison of data, and deepen the analyses.

By itself, XBRL does not ensure transparency but it provides the necessary platform on which transparency can be built. For example, using XBRL enables analysts, the regulators or the public to quickly identify missing vital information that sends up red flags. Failure to standardize data from disparate sources and give equal access to a host of users leads to delays in critical analysis and decision-making, including the very data mining that can be used to course correct in a real-time global marketplace—whether by the market itself or by market regulators.

Almost every industry has used some form of standardization to revolutionize performance—transportation (shipping containers, for example), retail (bar codes, for example). And now with XBRL, standardization is available for data.

In fact, there is evidence that the U.S. is moving slowly in this direction, using XBRL surgically with excellent results. The FDIC used XBRL to modernize bank system data collection leading to dramatic improvements in data quality and significant time and money savings. Hopefully by the time this blog is published, the SEC will have issued its final rule establishing an XBRL filing program for publicly traded companies. With digital disclosure and increasing transparency, information will be available directly to the public for many more eyes to see—better, faster, cheaper—a large step toward transparency.

Non-federal government officials also see the writing on the wall…

“Governments today compete for capital around the globe electronically. Our XBRL investments in an efficient global marketplace today will help sow the seeds for lower interest costs tomorrow,” said the Oregon State Controller John J. Radford, CGFM, CIA, CFE.

Internationally, there are many implementations—stock exchanges, tax collectors, central banks and regulators. The Netherlands is well along with a broad XBRL implementation with an estimated savings of $350 million. Australia’s implementation is in progress with six or more deployments and has moved within the public sector to embrace XBRL.

But we are moving at a snail’s pace. If we know the answer, why isn’t our government enforcing the solution?

Clearly we need more champions—like Radford and SEC Chairman Christopher Cox—executives that understand and promote XBRL to bring transparency into the market and to operations. The AGA is yet another voice in support. Others are needed.

I leave the reader with these questions.

How can we move to overcome governmental inertia and get adoption started?
What should be the priorities for advancing XBRL in the government sector?
What more can the AGA and members do to make this happen?

Protecting the Borders

AGA's Third Annual Internal Control & Fraud Conference concluded with an eye-opening presentation by David V. Aguilar, Chief, Office of Border Patrol, Customs and Border Protection, U.S. Department of Homeland Security. Charged with protecting 7,000 square miles of our nation's borders, Aguilar oversees a growing work force of 17,000. That number is expected to swell to 20,000 by 2009. Prior to becoming the chief, he oversaw the Border Patrol's operations in Tucson, AZ, a sector he calls "the center of the Border Patrol universe."

He said the American public reads daily about the ongoing efforts of the Border Patrol, and images that come to mind are fences, illegal immigration deterrence, narcotics deterrence and other roles. "Things changed for all of us on September 11, 2001," Aguilar said.

Because of the sizable assets assigned to the Border Patrol, he said the agency is a "target-rich" source for the inspector general community, but he welcomes the scrutiny. "It's a good thing."

It's critical for people to stop thinking of the Border Patrol as strictly the stopper of illegal aliens. "We are more about keeping people out who plot every day to come in and disrupt our way of life."

The essential elements to succeeding in this mission are the right personnel, technology and infrastructure. "The bad people looking to do us harm adjust to our efforts," he said, adding that protection doesn't begin and end at the borders.

Since taking office as chief in 2004, Aguilar is proud of the centralization that has occurred within the agency. In his former role, he said, he worked together with other field chiefs, but efforts were fragmented. "Now we work as one team focusing on one goal—protecting our nation's borders."

He talked about the difference between the needs on the northern and southern borders and offered the interesting statistic that 90 percent of Canada's population lives within 100 air miles of the U.S. border. This presents a staggering challenge to the Border Patrol. That said, however, 98 percent of the agency's efforts are focused on the southern border.

The centralized efforts are having real results. Arrests are down from 1.6 million to 876,700 for fiscal year 2007. Marijuana seizures are up 56 percent since 2001. He worries that falling arrest numbers will result in people thinking fewer resources are needed to do the work of the Border Patrol. That is not the case, he said.

"We've started and we're moving forward," he said, noting the enormous effort that has occurred since Sept. 11 to secure the nation's borders. "It's a continuing challenge—managing change."

—Marie S. Force

Transition and the Accountability Community

U.S. Department of Homeland Security Inspector General and conference technical committee co-chair Richard L. Skinner opened the second day of AGA's Third Annual Internal Control and Fraud Conference with an interactive discussion about the role the accountability community needs to play in the upcoming transition—at the federal, state and local levels.

"It's a pivotal year for the accountability community," Skinner said, adding that he is apolitical and doesn't support either presidential candidate but will serve whomever is elected. Regardless of who is elected, he said, the one thing the work force can count on is change. He offered the following list of areas where change is all but assured:
• Transparency
• Accountability (he joked about Barack Obama's "SWAT" team that will hold his managers accountable and fire under-performers, calling the term "SWAT" scary.)
• Trust in government. "We have to be able to trust in our government to do the right thing," Skinner said.
• Changes to the Government Performance and Results Act (GPRA) and Program Assessment Rating Tool (PART) programs, which both candidates have referred to as "broken."
• Promises for more grants for state and local governments.
• Less reliance on contractors.
• More investment in contract management and oversight, something Congress has also advocated.
• Control costs and eliminate redundancy.
• Improper payments—control the $55 billion a year in wasteful spending.

"The problem we have," Skinner said, "is the landscape in which (the new president) will enter. No one has ever come into office with a budget deficit like the one we have now." We're going to need a reality check to fund all the promises both candidates are making, he said. Out-of-control costs in Social Security, Medicare, Medicaid, food stamps and health care have to be contained along with transportation costs, reliance on foreign oil and the environmental impact of excessive gas usage.

To compound matters, one-third of the federal work force is eligible for retirement, which will result in a "devastating loss of the intelligence base." The challenges facing the accountability community are enormous, Skinner said. "We can sit back and watch what happens or we can become players. I think we have to stand up and be players." He referred to the government reengineering effort espoused by the Clinton-Gore administration, during which the accountability community sat back and waited to see what would happen. "Our areas were all cut," Skinner said. "We did not participate in the transition in an aggressive, assertive manner." When the new transition teams come in—at the federal and state levels—we need to be at the table to let them know the value we bring, he said.

Accountability professionals will be in competition with program managers, he warned, adding that we have to show the new team that we can help to maximize the use of the few dollars we have left to run the government. He bemoaned the lack of a strong lobbying effort on behalf of the accountability community and urged attendees to begin thinking collectively.

At the Department of Homeland Security, Skinner said real progress is being made in both the structure and functionality of the department as well as its ability to respond quickly to disasters. Since Hurricane Katrina, he's seen a redefinition of emergency management coordination and an excellent effort to respond in a more timely manner. Fraud exists in every program, but the bigger worry is waste when 10 times what is needed is sent to a disaster area, he said. "In our zeal to show the public we're responsive, we end up spending millions later to get it all back," Skinner said.

He called for a reinvigoration of the goals of the GPRA. After spending billions of dollars on programs, the Department of Homeland Security can't answer the very basic question—are we more secure than we were five years ago? The bad guys only have to be right once, he said, but we have to be right 100 percent of the time. The department doesn't have the performance matrices in place to ask where have we been, where are we now and where are we going. The lack of subsequent attacks after 9-11 isn't an indication of how secure we are, he said.

Topping the list of DHS priorities are:
• Maritime security
• Sharing of intelligence
• IT systems that don't talk to each other
• Security along the 7,000 square miles of border, something Skinner calls an "unbelievable challenge"
• Disaster recovery
• Protecting the food system
• Protecting the utility grid
• Enforcing immigration laws

"These are the things the inspector general has the responsibility to make known to the new administration," Skinner said.

—Marie S. Force

The Anatomy of Ethical Slips in Government

AGA Hall of Fame Speaker Marianne Jennings, JD, professor of legal and ethical studies at Arizona State University, addressed the Internal Control and Fraud Conference Monday afternoon, talking about the variety of ways people manage to justify unethical behavior.

She began by saying that the No. 1 thing Arizona accountants were disciplined for in 2006 was lying about their ethics requirement. With a wry, dry delivery style, Jennings presented one case after another of bribery, corruption and conflict of interest. "These are not close calls," Jennings said. "Bribery isn't nuanced."

Referring to a number of high-profile examples of public officials committing ethical breaches, she said, "It's been a record year for ethical breaches in 2007-2008. My father always tells me that he believes I'm in a growth industry."

She talked about pitcher Roger Clemens, who allegedly lied to investigators looking into steroid abuse in major league baseball, and former New York Governor Eliot Spitzer, brought down by a prostitution scandal, and the New England Patriots, caught filming other teams' signals and responded with "everyone does it."

Jennings expressed disappointment in the federal inspector general community, which has been beset by a series of scandals over the last year that resulted in a number of resignations. "These are the guards who throw down the flag and investigate. We lost a number of them in the last year, and that worries me."

Embezzlement, fraud, misuse of government property, conflicts of interest, bribery, manipulating reports and data, covering up unfavorable information—none of these things are close calls in the ethics world. Issues plaguing the financial market can be remedied, she said, "But if there's corruption in government, we're fooling around with some pretty fundamental things."

Often after a particularly egregious breach, people will tell you their intent was to save their company from major losses or embarrassment, which is a way to justify unethical behavior. However, Jennings said, this kind of justification can lead to anarchy if everyone feels it's OK to skirt the basic rules of society.

She encourages her students to come up with a credo—a line they won't cross no matter what. They write their credos on cards that she encourages them to take with them into the work world. One student called her about 18 months ago to tell her he still has his card and that she "bothers him" from time to time. Jennings took that as the highest form of compliment.

After three decades as a professor, she has often been offered an endowed chair that would mean more money, prestige and staff to assist her, but she has refused because, "I want to have the right to have a big mouth." She said a friend, who was once the Enron chair of ethics, has taken a healthy dose of abuse from his colleagues in the wake of Enron's collapse.

"Watch for slippage," she cautioned. Have a chalk line you won't cross. If you keep going back and forth across the line, the line grows fuzzy.

She also recommends that we reward people who used to be known as "snitches." We're not doing enough to protect people who throw down the flag, but these are the people we should be rewarding, she said. Often these people aren't terminated so much as "flatlined" in an organization as a form of punishment for speaking out about ethical breaches. "It's what you do, not what you say that's critical." Twenty-five percent of employees believe that managers retaliate against employees who report misconduct. If there's a disconnect between what you say and do, you won't get the information you need from the people who have it.

Jennings said her favorite statistic is that 99 percent of us believe we are the most ethical person in our workplace. However, she has noticed that the more education people have, the more money they make and the higher their position, the less likely they are to see the bright line between right and wrong.

Ethics is awkward. People like to refer to the acceptable gray area. "We tend to say this most often when the situation isn't gray at all."

—Marie S. Force

Collaboration Brings Results

Brian Miller, JD, inspector general at the U.S. General Services Administration, was Monday's second speaker at AGA's Internal Control & Fraud Conference in Phoenix. He discussed the Procurement Fraud Task Force, launched in 2006 as a collaborative effort across the federal government to leverage resources in the fight against procurement fraud.

Areas covered by the task force include, but are not limited to, defective pricing, product substitution, misuse of classified information in procurement, false claims and grant fraud.

Prior to his role as an inspector general, Miller was an assistant U.S. attorney, prosecuting a wide variety of crimes. He said there's a big difference between prosecuting a drug case where you only have to show a connection between the defendant and the drugs and a procurement fraud case where you have to prove intent. It's not enough, he said, to tie the individual to the fraudulent transaction. You also have to show intent and reckless disregard. "That makes it a much more difficult case," Miller said because it requires proving thoughts.

However, perpetrators of these types of crime often plan them in advance. They are not "heat of the moment" crimes, thus there is often a paper trail—if you know where to look. It's not enough, he said, for organizations to have a code of ethics and to think that's all you need to deter fraud. He referred to a November 2001 letter from Kenneth Lay espousing Enron's sterling ethical environment.

Miller called procurement fraud "crimes against the integrity of the process" and called on the honor system to help ferret them out. "To make it work," he said, "you have to enforce the violations." Violations include lying under oath, making false statements, obstructing audits and destruction of corporate records, which is now forbidden under the provisions of the Sarbanes-Oxley Act. "You can't have an honor system if people cheat," Miller said.

He said the task force has committees working in a variety of areas to address the subject from all corners. Committees include: grant fraud, information sharing, intelligence (looking at the special challenges of dealing with classified information), international, legislative (which scored a success with the new FAR rule that requires contractors with more than $5 million in contracts to report overpayments and crimes to inspectors general), private sector outreach and training. Regional working groups led by U.S. attorneys are focusing on procurement fraud across the United States by sharing leads and information. Since the task force was created, 360 procurement fraud cases have been adjudicated.

Miller talked about how important e-mail has become to this process. "I call it God's gift to prosecutors because people say the darndest things in an e-mail." He cited one example in which someone wrote in an e-mail, "Don't tell Medicare about this," and another that said, "If the SEC finds out about this, we're in big trouble." To which the recipient replied, "If the FBI finds out, we're out the window."

With a big smile, Miller said, "E-mail is a wonderful thing."

Kansas City Mayor Mark Funkhouser Kicks Off AGA's Internal Control and Fraud Conference

Mayor Mark Funkhouser said Monday morning that he's all about following the money in his new role, after spending 18 years as Kansas City, MO's auditor. In a session titled, "Smart with the Money: Governance and Control in a Time of Financial Crisis," Funkhouser outlined the systemic problems plaguing his diverse, multi-cultural city. His presentation led off AGA's Third Annual Internal Control & Fraud Conference in Phoenix, AZ.

Elected on a platform that went something like this: "We're still going to spend the money, we're just going to spend it smarter," Funkhouser is challenged every day in trying to live up to that promise in a city that is all about the "deal of the day." A city that has invested more than a billion dollars in stadiums for its football and baseball teams faces a crumbling infrastructure and was on the brink of financial failure when he took office. It was so bad, he said, he wondered if officials would be able to make payroll. They have since stepped back from that precipice by reforming budget practices and cutting waste wherever they can find it.

After 18 years of auditing the city and after teaching and studying government, he considered himself an expert when he took office. He has since found out otherwise. At the core of his city's financial issues is a failure to control costs and a series of out-of-control deals with developers that don't benefit the city. For instance, the city funds the local zoo, which is a private enterprise. Funkhouser fought against funding for the zoo in this year's budget because he felt the money could be better spent on new police officers to combat a growing violent crime wave. He was overruled and the city gave more than $4 million to the zoo. He calls these policies "toys for the rich."

When asked what keeps him awake at night, he says debt service. With Kansas City more than $2.6 billion in debt and the property tax base eroding as residents flee the city, he worries about funding future police and fire department needs. He has succeeded in instituting a debt policy that has put some controls on deals that don't benefit the city. He comically related a story that one of his advisers shared: People who used to rob the till with both hands are annoyed by Funkhouser because now they have to use one of those hands to fight him off, which means they can only take half as much money as they used to. "And yes, they are annoyed with me." Still, he counts that shift from business as usual as a success. "I'm not paying sticker price for everything that comes in the door."

He sees proper governance as critical to his role as mayor. The policy choices he makes every day are "city-shaping" decisions. If you make the wrong decision, nothing can save you. This is the structure whereby citizens assert control. It is how democracy gets translated into decisions, and the misuse of public funds derails all progress. Often, he said, finance professionals tend to look at "retail" fraud, such as improper purchases, when they should be looking at the more encompassing "wholesale" fraud.

Funkhouser is also concerned about the failure of the Kansas City government to invest in its personnel. Whenever they do make a staff investment, they are berated in the media for wasting public money. It's a Catch 22 because with only five CPAs in the entire government, mistakes are going to happen. That's how the city ended up with a $1.04 million error in the closing of last year's books. "So the technical competence just isn't there," Funkhouser said, "and we haven't invested in it." He hopes to change that during his term.

As part of the strategic direction for the city, Funkhouser believes that he has to convince the middle class to stay or return to ensure the city's long-term survival. "You have to take care of the money to take care of the people," he said. "If you don't take care of the money, nothing else you do matters."

One thing he was unprepared for when he ran for mayor was the vitriol of modern politics, which has focused in equal parts on Funkhouser and his wife, who has been formally banned from City Hall and has been the subject of 90 unflattering newspaper articles. "Are we having fun yet?" he asked in jest. The answer: No. "It's very, very nasty." It occurred to him recently that he's had just one fun day since he took office and that was the day a tornado ripped through the city. He asked the fire chief what he should be doing, to which the chief replied, go out and talk to people. So that's what Funkhouser did, and he was stunned that citizens who'd lost everything were happy to see him. After spending hours visiting with the victims, he took a helicopter ride to view the destruction from the air. Looking down, he saw public works removing downed branches and public safety officers aiding in rescue and crowd control. "That was a city that works, and that was the best day I've had as mayor."

—By: Marie S. Force

Preparing to Govern: When Candidate Becomes President

By: Katie Malague

Katie Malague is a senior program manager with the Partnership for Public Service.

This winter, for only the second time in 16 years, the White House will get a new inhabitant. During the primary campaign season—which included nearly 50 debates—candidates rarely discussed federal management. Yet, the next president’s success rests largely on his ability to effectively manage federal operations, with the help of a highly skilled management team. Amid tremendous pressure to score major policy victories in the first 100 days, the new administration must also quickly invest in government’s long-term organizational health.

Once in office, the new president will essentially become the CEO of the nation’s largest employer—our federal government, with 1.9 million people. But unlike other new CEOs, he’ll inherit an organization with a more complex, some might say daunting, mission—one that affects every American. Whether preventing tainted toys from reaching our shelves and tainted food from reaching our tables or rescuing hurricane victims from their homes and financial institutions from ruin, it’s a role with unparalleled management challenges.

Getting the “people piece” right won’t be easy or glamorous. Despite repeated government reform efforts, federal management challenges persist. To improve government performance, the next administration should focus on four components of an effective work force: the right talent, an engaged work force, strong leadership and public support. Priorities that will promote meaningful reform include:

Get the people piece right. Congress usually tries to fix government by reshuffling the organizational charts. As the 9/11 Commission said, “The quality of the people is more important than the quality of the wiring diagrams.” The next administration should focus on getting the right talent into government both in our civil service and in its roughly 4,000 presidential appointments. A centerpiece of the strategy should be a renewed call to service as the beginning of a drive to restore prestige to government.

Pick professionals, not politicos. Some of the most important posts the next administration will fill are senior management posts such as chief financial officers, chief information officers and chief human capital officers. These non-ideological positions should be filled with management experts, and, to be effective, they’ll need to be a core part of each agency’s leadership team.

Build upon programmatic and operational successes. The next administration should resist the temptation to “wipe the slate clean.” Instead, the incoming team should assess what programs are working, and then build and improve on those efforts. This will prevent additional skepticism and provide for early wins.

Fix the broken hiring process. The federal hiring system should be fundamentally rethought so that adherence to long-standing federal public policy goals, such as merit-based selection and veterans’ preference, continue to be met while the government substantially improves its ability to attract the best possible talent.

Update our nation’s compensation and classification system. The General Schedule pay and classification system should be phased out in favor of a more market-based and performance-oriented compensation system. The new pay system must be preceded by a transparent and credible performance management system for employees and should create a level playing field for all agencies by providing a common set of guidelines and requirements.

Develop measurements to promote accountability. It’s hard to change what you can’t measure or fix what you don’t know is broken. To be successful, the next administration must develop meaningful ways to see what’s working and what isn’t. Best practices can be replicated across government, and exposed trouble spots can be confronted before they become public problems of Katrina proportion.

Prepare incoming presidential appointees for federal leadership. With an average tenure of less than two years, political appointees can’t afford to learn the ropes gradually through trial and error. They should receive orientation regarding government operations, laws and policies immediately upon assuming their position and thereafter, as needed, throughout their time in government.

Make management a priority from the top. Senior leaders will not see government reform as a priority unless it is a priority for the president. The president must make it clear to political appointees and civil servants that these management issues are central to achieving his goals.