Are you Front Page News Again? Tips for Avoiding the Government News Follies

By Kimberley K. Higgins, CPA

Scandals involving elected officials fill the local newspapers these days; and while the stories are worth a good snicker, most governmental entities are mortified to find themselves on the front pages, or any pages of a newspaper. Greed and envy isn’t confined to the ‘Enrons’ of the world, as some recent media stories have illustrated:

A county pays a landscaper $1,000 per acre to cut derelict lawns when the commercial cost is closer to one tenth the price. A city manager buys $300 pens, flowers from his wife’s florist shop and other luxury leather items such as sheepskin covers for his city-owned SUV, all at taxpayer expense, and enjoys a “booze-filled” trip to Hawaii. He deems none of it “excessive” or “significant” A city manager’s wife causes an accident in a city-owned car while on personal business and has the city pay for the damage. The city manager himself stays at five star hotels when he attends conferences, dines lavishly and outfits his city-owned truck at taxpayer expense – at a time when the city is experiencing budget problems. The manager prefers to use the city-owned truck for his private vacation and hunting trips, which he fills up at city expense, despite owning three private vehicles. An urban renewal authority’s board racks up approximately $160,000 during a two year period for travel, meals and training; dining at the most expensive restaurants in Las Vegas, but noting in defense that it’s “expensive to eat there.”

When the economy is tight, the public increasingly scrutinizes administrative costs, compliance and processes for transparency. They want services, not what is seen as government excesses. Despite the best processes in place, mistakes happen, and failures occur. If your governmental entity does become the subject of intense public and media scrutiny, what can you do to control the damage, alleviate the situation and defuse the problem; and then ensure there is no repetition?

What not to do is become defensive and excuse the unreasonable behavior. Media frenzy quickly abates when the perpetrators publicly apologize, and reimburse the entity for unreasonable expenses. New oversight policies then need to be promptly adopted to avoid becoming front page news again. When audit failures occur, proactive processes in place help control damage and keep stories out of the media. Here are some suggestions for policies and procedures to shield your governmental entity from abusive practices that could lead to media charges of mismanagement:

• Invest in competent outside auditors who ask tough questions and look for excesses; and maintain good communication with them. Auditors lend credibility to financial statements and opine on processes out of place, or the lack thereof. For example, how might school districts deal with money teachers collect for school trips? What about the example of the school janitor who empties the school’s vending machines and keeps the money in his bank account for safekeeping? No fraud here, but how will that play in the newspapers?
• Write a fraud and abuse policy to protect employees who want to report excesses. An anonymous 800 number is one suggestion.
• Create strong internal governance and governing boards. Provide training for board members so they can ask tough questions and be effective stewards. It takes a long time to build trust, but minutes to destroy.
• Put in place a good record retention policy. Staff need to understand what policies are in place regarding retention of documents, emails and voicemails. The HR manual should address this. For example, what happens to voicemails, emails or sensitive documents after three months? Policies should address these issues so that everyone is clear.
• Form an audit committee with teeth strong enough to ask the tough questions. They approve all the services of an external auditor, meet regularly with the auditors, field accounting complaints, and should be involved in the interview and selection process of the outside auditor. Many members of an audit committee feel they lack the skills to understand financial statements and ask the tough questions. Bring in an outside financial professional to help the board identify those financial questions and technical accounting issues that can delay issuance of a clean financial report.
• Put processes in place to ensure that appropriate management and elected officials have examined and signed off on financial statements.
• Ask for a management letter. Regard the letter as a form of accountability: a ‘chat’ with a series of suggestions. It is the auditor’s way of communicating with the Board about weaknesses and potential trouble spots in the system. Auditors will state the issues as they see them, but it’s up to the Board to decide what to do. Auditors do have final leverage, however, if they decide not to issue an unqualified opinion. Normally, a management letter delivered to the Board is not a public document, but theoretically can become public and used as a press release.
• Notes in the financial statements are another way to give and receive information and fulfill the need for disclosure. How do we handle various policies and procedures? What makes up the numbers? How safe are the entity’s investments? For example, a loan fund gives the manager a loan to buy a house. What are the details? What makes up the numbers? How safe are your investments?
• Finally, ‘fess up to the problem when there has been a failure. Nothing raises the public’s ire more than when an official brushes off an allegedly egregious act as “justified,” “not excessive” or “not significant.” Reimbursing the entity for unreasonable expenditures, and a public apology and statement that policies will henceforth be put in place goes a long way to mollify the media and calm the public. And then, actual execution of sound policies and procedures.

Financial accountability is similar to a three legged stool: Governing Board oversight, competent Government staff and competent outside attestation - all must be firmly in place or accountability fails. By tightening internal controls, ensuring proactive processes and policies are in place, hiring competent staff to provide the information, organizing strong internal governance and governing boards and training your board members, you can avoid your entity becoming front page news.

KImberley Higgins is a is a government and nonprofit partner at the Denver Tech Center office of Gordon, Hughes & Banks, LLP. He can be reached at (303) 770-5700. This article appeared in the CGFOA's June 2006 Footnotes newsletter.