Monday, January 26, 2015

Chiming in on the TUSD Internal Auditor Debate

Posted By on Mon, Jan 26, 2015 at 9:00 AM

I've stayed quiet on the question of whether TUSD should have an internal auditor. I'm an experienced educator and classroom teacher, not an administrator or budget analyst. I dive into administration-level questions when I feel I have to, like now, but I don't do it with a great degree of confidence.

Some board members and others have been pushing TUSD to hire an internal auditor who would look deeply into the district's finances, its compliance issues, questions of fraud or financial mismanagement, and so on. Board member Mark Stegeman has pushed the hardest, long before H.T. Sanchez became superintendent. In fact, before Stegeman was elected to the board, he was on the district's audit committee and was pushing for greater scrutiny of district finances back then.

The topic has been discussed and debated for years. It looked like it might be resolved when Stegeman and fellow board member Cam Juarez got together and created a compromise proposal. But in the end, it was voted down at the Jan. 21 meeting, with Juarez voting against the proposal he helped create.

I think it's very possible having an internal auditor at TUSD is a good idea. If that sounds like a weak, cautious endorsement, that's because it is. I'm more certain that, unless the function is abused, it's not a bad idea. The main abuse I see would be a board member using the auditor to go on fishing expeditions and witch hunts—the TUSD equivalent of the endless congressional Benghazi hearings of the past few years ("I know we'll find something, anything, if we look long and hard enough!"). But the proposal just voted down stated that the auditor can't take direction from a single board member. It "may receive direction only from the Governing Board (in quorum) or from the Superintendent or designated staff to the extent authorized by the Board (in quorum)." That means one or two board members can't use the auditor as their private investigatory tool.

So I'm leaning toward the idea that an independent auditor might be a good idea. But I have a number of reservations I want to discuss here, many of which I haven't heard brought up in recent discussions. A warning: I'm planning to get windy and very deep in the weeds soon, so if you're not really interested in the topic, run for your life before it's too late! That being said—

The current justification for hiring an internal auditor is the May, 2014, Operational Efficiency Audit produced for the district by Gibson Consulting Group. Among other things, the audit recommended "an internal audit function that reports directly to the governing board." The beginning of the recommendation (it starts on page 14), has been much quoted by people in favor to give greater credence to their call for an internal auditor. What's less quoted are the details of the recommendation. Gibson Consulting says the district should begin by "hiring an outside firm to conduct a comprehensive risk assessment" at a cost of $75,000. Gibson happens to offer those services. It also says that, once district hires an internal auditor, it should also continue to use "contracted resources," which, of course, Gibson could supply. 

On Gibson Consulting's website, the company is clear that it's in the business of "offering Internal Audit services." So while the company's recommendations may make good sense, it's important to realize the Gibson folks have some financial skin in the game. The more school district internal auditors in the country, the more potential business for Gibson's services.

How much would an internal auditing function cost TUSD? According to the Gibson audit:

Based on the size of TUSD, it should invest $250,000 a year in an internal audit function, likely through a combination of in-house (one to three full-time equivalents) and contracted resources.
So, for the five years in its recommendation, TUSD would spend $325,000 the first year, which includes the outside risk assessment, and $250,000 every year after that. Supporters of the idea say the district could spend less, more like $100,000 per year, but that wouldn't follow the letter of Gibson's recommendation.

But maybe the internal auditor function would pay for itself in money saved in the districts's day-to-day operations, along with possibly avoiding costly lawsuits resulting from noncompliance issues, injuries caused by unsafe conditions, etc. Maybe so, maybe no. According to the Gibson audit:

While there is no guarantee, most internal audit functions experience a return on their investment through cost savings or improvements in internal controls.
This is literally a case of "You pay your money, and you take your chances." The only way to get a sense beforehand if internal auditors are cost effective would be to look at other districts with internal auditors.

Adding a quarter of a million dollars to TUSD administrative expenses at a time when many people accuse the district of being administratively top-heavy and Governor Ducey is proposing a shift of district money into the classroom could be ill-advised, if not downright foolish. It isn't all that much as a percentage of the TUSD budget—Less than one-hundredth of one percent—but a quarter of a million ain't chopped liver.

The Gibson audit made it sound like TUSD is out of the norm because it doesn't have an internal audit function:
TUSD does not have an internal audit function, which is unusual for such a large school district.
Is that true? So far as I know, Mesa is the only school district in Arizona that has the position, but it's also one of the few big districts in the state. TUSD is the biggest. I admit I'm on shaky ground here, but a Google search revealed that a large number of districts in Texas and Florida have internal auditors, and a recent law passed in New York state makes them mandatory for every district over a certain size. Otherwise, I only found scattered districts with internal auditors in other states. If anyone knows I'm wrong here, please correct me.

If I'm right, two of the three, Texas and Florida, are states which are some of the least worthy of education emulation in the country. The two states, formerly headed by the Bush brothers, along with Arizona, led in its education priorities by the Goldwater Institute, form an unholy triumvirate of bad education ideas. As for New York, the state is so riddled with corruption—if you've been following the latest scandal involving state assemblyman Sheldon Silver, it's just the most recent of many—it probably makes sense to have independent financial watchdogs snooping around wherever possible. So I'm not sure the internal auditor function in school districts is as widespread as Gibson Consulting states, which weakens the "Everyone else is doing it" argument.

Where is Gibson Consulting located? In Austin, Texas. (Consulting for TUSD from Texas? Again? In the words of the film, The Wizard of Oz, let me say, Dr. Sanchez, you're not in Kansas Texas anymore. I hope you're broadening your vision for outside resources beyond the birthplace of yearly high stakes testing and a host of other political ills.) The Gibson/Texas connection may help explain the existence of so many school districts there with internal auditors, and the Texas/Florida connection could explain why the idea spread to The Sunshine State. I'm just speculating, of course, but it seems curious to me (if true) that so many districts have the function in those states and so few in other states.

One area of controversy in TUSD is, if the district were to have an internal audit function, would the audit director report to the superintendent or the board? My Google search indicates there's no consistent answer. Some report to the board, some to the superintendent or elsewhere.

One final note I find interesting. Yousef Awwad was TUSD's Chief Financial Officer (CFO) during Sanchez's tenure and during previous superintendent John Pedicone's as well (He left TUSD recently). When Pedicone was superintendent, Awwad wrote a memo about the idea of an internal audit function. He said he supports the idea of internal auditing, but he thought one internal auditor wouldn't be enough to do the job, which means that the $250,000 a year estimate from Gibson Consulting is closer to Awwad's estimate than the more conservative $100,000 figure. He mentioned that TUSD and Scottsdale used to have an internal audit function "before being eliminated due to administrative cost reduction efforts." In both cases, the director reported to the CFO, which is what Awwad recommended if TUSD decided to resume the function.
The purpose of all this information is to add to the discussion, not to come to a definite conclusion. I'm still undecided about what the district should do. If there were money enough, I'd say, do it. If I suspected deep-seated corruption in the district which has gone undetected, I'd say, do it. But there's no extra money floating around, and I don't see any evidence of truly bad actors in the district putting money in their pockets illegally. So this is probably an especially bad time to think about hiring one to three more administrators to look for problems which may not be there. If it's a good idea, and I still believe it might be, it would be better to wait for a more stable financial moment.

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