Management by Audit

An independent review offers not just oversight, but insight.
by | August 4, 2010 AT 5:00 PM

Audits hurt. Whether it's your taxes or your agency, no one likes being audited. Done right, however, an independent audit can be a valuable tool for positive change. If you are interested in better, faster, cheaper government, a good audit can be your best friend.

Much depends on the approach taken by the auditors. If the auditors focus solely on compliance with rules, the results are of limited value. If the auditors look more broadly at how well an agency is fulfilling its mission, the value can be tremendous.

Unfortunately, all too often an audit will focus 100 percent on compliance. If money is being wasted, the auditors don't care, so long as all the forms were filled out correctly and the wasteful spending was meticulously documented.

When I served as the head of the Division of Unemployment in Massachusetts, we had a problem with "frequent flyers." These individuals, often small business owners, would collect unemployment year after year, in essence turning a $1,500 unemployment tax into an annual $15,000 unemployment benefit. There was one woman, Mrs. Q., who owned a jewelry store on Nantucket. She "laid herself off" every October, and we sent her unemployment checks in Del Ray Beach, Fla., all winter long. Year after year.

So long as her paperwork was properly filled out, which it was, our audits wouldn't identify this as an issue. Clearly, this sort of programmatic abuse wasn't in the public interest, but the problem was missed by an audit focused solely on compliance.

A good audit offers not just oversight, but insight.

A more wholistic audit approach can identify issues above and beyond pure fraud or error. For example, the U.S. Government Accountability Office's (GAO) 2010 report on Medicare Advantage plans did an analysis of plan design versus beneficiary makeup, and found that insurance companies were "cherry picking" the healthier population through how they designed their offerings. From the company's perspective, it was simply rational, profit maximizing behavior. But from the perspective of the Centers for Medicare and Medicaid Services, this was a hidden problem that needed to be addressed.

Compliance audits are still important, of course. In September 2009, the GAO released an audit of the Medicaid prescription drug program. The findings generated national news, as the GAO's review of just five large states found roughly 65,000 instances of individuals improperly obtaining addictive drugs such as OxyContin. The fraud was widespread, as the audit revealed thousands of prescriptions written for dead patients who, generally speaking, don't really need painkillers. It also showed that a significant number of live patients would have the same prescription written by multiple doctors and filled at multiple pharmacies. States had missed these red flags.

The fraud costs came in at $65 million during 2006 and 2007, and the audit conclusively showed that state programs were grossly inadequate at monitoring the program. In this instance, a thorough compliance audit was sufficient to highlight areas for needed change. In essence, the audit was a tool for transparency.

Today, when we think of transparency, we generally think about making public databases open to the public. But a data dump would have done little good in this case, since it wouldn't have identified the problem. Only a case by case sampling would find this kind of fraud. In this sense, audits are an important aspect of transparency. Having an independent agency conduct a review of the compliance and performance of an agency can uncover shortcomings in operations.

There will always be an uncomfortable, semi-adversarial relationship between the auditor and the auditee. That's good. Without it, there is too much pressure to keep the problems "in the family." That won't get the problems solved.

One of the toughest challenges in public-sector management is how to keep an auditing group productive. Unlike customer service functions, where citizens will complain about poor service, the audit function is entirely back office. Certainly, the agencies being audited are unlikely to complain about lackluster audits, and politically speaking a "lap dog" audit agency rarely finds itself in the sort of hot water that a "pit bull" audit group does.

Like all professional disciplines, auditors bring a personality consistent with their positions. Pop stars are snazzy dressers, politicians are gregarious and the best auditors are professional, meticulous and circumspect. Their writing style tends to the prolix and soporific. This creates something of a problem. Audit reports make for painfully dull reading. In many cases, findings that should create a furor are ignored because they are buried in sleep-inducing prose.

The "dull factor" is a serious problem for which I suggest a humorous solution. Let the auditors write their report, then hire a PR firm to write the executive summary -- which is the only thing a busy journalist will read. Then, give the report a snazzy title and put a picture of Lady GaGa on the cover. Maybe then the important work of independent auditors will get the sort of attention they merit.