Expensive audits

It’s the auditing season for small cities in our region and, if this year is like others we have covered over the past three-plus decades, taxpayers will learn very little from a time-consuming and expensive process.
Auditing of public books has merit, as a way to ensure that public finances are being tracked appropriately, using well-accepted accounting methods. But when you consider what small cities are paying for their annual audits, taxpayers have a right to expect more.
Tower, for example, will spend about $30,000 on its audit this year, or nearly eight percent of the city’s total tax levy. That’s $30,000 that won’t be going for street repairs, emergency services, snowplowing, recreation, or any of a dozen other things that would provide more real value to the residents of the city. And for that money, the city will receive a document that is largely unreadable and of little practical value to city officials.
Sometimes, they just create unnecessary confusion and controversy. Even auditors will advise the public not to put too much credence in the numbers they present, which at best are mere snapshots of a point in time usually months in the past and, at worst, are simply wrong.
There’s a general perception that audits are designed to uncover financial wrongdoing, but that’s not the primary objective of most municipal audits. They’ll do a few spot checks of a sampling of bills or other expenditures to make sure that the money went to the right place and had adequate backup documentation, but the public should be aware these aren’t forensic audits designed to catch intentional fraud or misallocation of funds.
While cases of fraud in government are not uncommon, they are rarely uncovered through audits. It’s typically whistleblowers within the organization who bring such cases forward. That was the case in Dixon, Ill., several years ago, where the city’s comptroller systematically embezzled more than $54 million over more than 20 years. For that entire time, a large and experienced accounting firm gave the city a clean bill of health year after year.
Auditors routinely note that they are providing an “unqualified” opinion, which means they are confident that the city’s financial accounting is being done according to standard accounting practices. That’s fine, but it provides no evidence that the city’s finances are in good health or that public funds are being spent efficiently, which is a justifiable concern for the public.
We recognize the value in proper accounting of municipal funds, but that goal could be better served far more affordably by requiring regular training in public accounting for city clerks or treasurers. Auditors could be tapped as needed to assist city officials in establishing proper accounts— based on the state’s approved chart of accounts— and understanding how to properly allocate the funds that come in and go out of the city’s coffers. It’s far better to head off the accounting errors that auditors catch by helping city staff better understand how to do their jobs.
The cost of municipal auditing is particularly onerous for the smallest cities, which have a limited tax base from which to pay those costs. So, why do small cities continue to pay these exorbitant bills for an audit most city officials will barely understand once it’s completed? Certainly not because they want to. State law currently requires annual audits for all cities with a population over 2,500 and for all cities under that threshold that combine the offices of city clerk and treasurer, as long as they have annual revenue of $275,000 or more. Even the tiniest cities in our region typically exceed that limit, due mostly to grants. Unfortunately, those grants don’t pay the auditing bill.
Keep in mind, the cost of auditing goes well beyond the bill from the auditors themselves. The audits, which can take two or three weeks depending on the year, consume an enormous amount of city staff time as well, and that can be particularly difficult for small cities, which tend to be understaffed as it is.
The law, as it exists today, already recognizes that there has to be a balance between the size of the city and the frequency and cost of auditing. Yet, the Legislature could do more to help small cities by changing the auditing requirement thresholds to allow more small cities to avoid costly audits or require them with less frequency. That would undoubtedly be opposed by the CPA firms that rake in hundreds of millions of dollars annually on public audits in Minnesota, yet it would be good news for the taxpayers who have to pay these exorbitant bills each year for a document that, in reality, provides very little benefit to the public.