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Creating Value-Added Internal Audit in Local Government

Creating Value-Added Internal Audit in Local Government

As we move beyond an extended period of plentiful federal and state grant availability, many local governments will face an inevitable “funding cliff” and begin the struggle to do more with less. This new era will create an opportunity for governments to foster a continuous focus on improvement. But who can lead this continuous improvement focus? That leadership can come from, to many, what might be an unlikely source.

The Internal Audit Department, or even more broadly, your compliance function, possesses the exact skills necessary to create that focus on continuous improvement. Let’s explore how Internal Audit can drive continuous improvement through the following core competencies.

Assessing process and business efficiencies

Internal auditors, by nature, are proactive and have a strong process orientation. They are also inherently skeptical and will always question, “Is that the best way to get from point A to point B.” This guiding principle results in a consistent focus on assessing the current state and identifying opportunities for greater effectiveness.

But Internal Audit can go beyond that. Identifying the recommended effectiveness alone is not enough. You must implement the recommendations. However, you need to update your policies and procedures to implement them. Internal Audit can help with that as they know your policies and can update them based on their work. They can also help train personnel on the newly implemented processes. Finally, your compliance specialists can help monitor the newly implemented processes. After all, “what gets monitored gets done.”

Identifying cost and waste reduction opportunities

In the same way that Internal Audit can evaluate the effectiveness of established processes, they can also determine if they are as efficient as possible. Internal Audit can benchmark the established processes against peer and best-in-class organizations. In many instances, cost savings will be identified by redesigning processes to reduce the hours required to perform tasks. This can be achieved through better training of existing personnel, better use of technology, and even redeploying employees to other areas where needed.

Waste is a bit trickier to assess. The U.S. Government Accountability Office defines waste as using or expanding resources wastefully, extravagantly, or for no purpose. Internal Audit can assess the purchasing patterns within your organization to determine whether wasteful spending is occurring. It can also evaluate the nature and extent of assets the reviewed area utilizes to ensure appropriate investment.

Identifying and assessing poorly controlled risks

Governments can also lose money in areas where operational or compliance risks are uncontrolled or poorly controlled. Internal Audit, at its core, is a risk management function, so it is logical to utilize its skills to identify where such operational and compliance risks are poorly controlled. The team will make recommendations to improve the effectiveness and efficiency of processes (where have we heard that before?) for these poorly controlled risks. It can also monitor whether such changes have been implemented.

Many governments lose significant money in areas with substantial uncontrolled risks. Internal Audit should regularly assess organizational risks—we recommend at least every three years. Internal Audit can evaluate the cost to the government of this uncontrolled risk, estimate the cost of implementing a fix, and determine the benefit of controlling the risk.

Controlling an otherwise uncontrolled risk and the resulting cost savings is another area where Internal Audit can generate a significant return on investment for the government.

Assessing the quality and timeliness of data

Local governments are relying more on non-financial data to make critical operational decisions. Financial data is already subject to some critical analysis through annual audits, but there is no yearly rigor around non-financial data. Bad data leads to bad decisions that lead to lost revenues, additional incurred costs, or both. Internal Audit should be used to subject non-financial data to some additional scrutiny.

This data quality assessment should include assessing whether the data is relevant, reliable, consistent, and timely.

Relevance is critical to ensuring that the data being used really pertains to the risk being controlled.

Reliable means that the data has integrity and support.

Consistency means the data will be prepared the same way again and again.

Timely means the data is current and can be used for decision-making.

Improved data quality leads to improved decisions and more effective and efficient processes and savings. Internal Audit should play a leading role in assessing data quality.

Internal audit is a valuable position in government as one of the few offices with visibility across the organization. Take advantage of that role by asking them to create value by serving as value-adding internal consultants.

 

04/12/2024

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