Protecting public dollars

At a time when lawmakers are pinching pennies to fill a $4.6 billion budget hole, the last thing they want to hear is that state funds are being stolen, misspent or otherwise squandered. But according to the state’s internal watchdogs, that’s exactly what’s been happening — over and over again.

Take the Department of Natural Resources, which inappropriately spent $300,000 on a private conference that included a golf tournament and fishing trip — or the Board of Barber and Cosmetologist Examiners, where $10,000 has gone missing, possibly due to employee fraud. Then there is the Department of Human Services, where a supervisor managed to defraud the state of more than $1 million over a five-year period before a bank teller finally got suspicious and tipped off authorities.

These recent examples represent some of the worst cases documented by the Office of the Legislative Auditor. But what worries legislators even more is a series of recent OLA reports revealing a pattern of inadequate financial oversight at state agencies nearly across the board, suggesting that the potential for future abuse of taxpayer dollars is even greater.

“The legislative auditor’s reports have been, I think, very damning in the last year about the state of internal controls and financial management across a great number of state agencies,” said Rep. Ryan Winkler (DFL-Golden Valley), who has worked extensively on the issue.

In theory, agencies are supposed to have policies and procedures in place that prevent state funds from being misspent. These accounting practices, known as “internal controls,” are designed to ensure that funds are spent appropriately and according to generally accepted accounting principles. For example, one commonly used internal control is to ensure that financial transactions are always handled by more than one person; this way, a single employee cannot commit an act of fraud without someone else noticing.

“It’s a kind of check-and-balance within an organization,” explained Legislative Auditor Jim Nobles, who said the state of internal controls in Minnesota state government is “in need of strengthening.”

Nobles and his staff have found that the problem of lax internal controls is a common theme at state agencies. He points to the DHS incident as a classic example; even though a single individual perpetrated the fraud, Nobles said the department as a whole bears responsibility because lack of oversight enabled it to happen.

“Clearly, it was a criminal act, but it was a criminal act that was allowed because of weak internal controls,” he said.

Fixing the problem

According to statute, Minnesota Management and Budget is the state’s lead agency on internal controls, meaning that it bears ultimate responsibility for the financial management policies used by the state. In the wake of so many negative legislative audits, many lawmakers want MMB to step up its oversight.

Winkler, who serves as vice chairman of the House State Government Finance Division, and Rep. Keith Downey (R-Edina), a former consultant at an accounting firm, have teamed up to push for a bipartisan solution to the state’s internal controls problem.

HF1781, the omnibus state government finance bill, contains language crafted by the pair that would strengthen internal control structures across state agencies using well-known private-sector accounting standards. Rep. Phyllis Kahn (DFL-Mpls) sponsors the bill, which awaits action by the House Finance Committee. A companion, SF1395, sponsored by Sen. Don Betzold (DFL-Fridley), awaits action by the Senate State Government Budget Division.

The Winkler and Downey proposal would ask MMB to take a more proactive role in promoting proper internal controls in state government. It would also expand the job duties of the Legislative Audit Commission, and establish an independent “financial controls council” that would review and make recommendations on the state’s financial management practices.

“The idea is to be very clear in statute about what internal control policies (Minnesota Management and Budget) is required to establish,” Winkler told members of the division April 7. He added that the legislation provides “a lot more detail” than current statutes about what internal controls should encompass.

Downey said parts of the legislation are based on lessons learned from his experiences in the private sector, where he said best practices for accounting are already widely agreed on.

“I think we need to have a very intentionally designed internal audit, risk assessment and proactive approach to internal auditing that we don’t have today,” Downey said, adding that public sector organizations can learn much from the business world.

Winkler faults the Pawlenty administration for allowing staff reductions at MMB to weaken the state’s internal controls over the years.

“In the last eight years, the department of finance has lost 30 percent of its staff. As part of that total reduction, they have eliminated all auditor positions,” Winkler said, calling the reductions a sign that the administration hasn’t made a priority of taxpayer accountability.

Downey agrees that state agencies need to have a larger audit staff, but disagrees that the Pawlenty administration has let the state’s internal controls lapse. He points to a proposal in the governor’s budget to provide MMB with an additional $700,000 a year to expand its financial oversight activities. As outlined in the agency’s budget narrative, the proposal acknowledges that recent legislative audits “have identified a disparate set of weaknesses in agency financial controls,” and recommends “more robust training and support” for agency staff.

Nobles said he generally supports Winkler and Downey’s legislation, and has been in touch regularly with Winkler on the issue. Although he does not agree on the necessity of the “financial controls council” proposed, he said the overall effect would be to give OLA extra leverage to push for good internal controls in state government.

Moreover, Nobles said the mere fact that legislators are giving the issue so much attention this year is making his job easier by raising awareness of the issue.

“They have really been attentive to this issue this year, and I compliment them on that.

And getting that backing from legislators… is very helpful to the work that the legislative auditor does,” he said.