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Mitigating the Global Financial

Crisis ImpactThe Role of Government Auditors

Richard F. Chambers CIA, CGAP, CCSA

President and CEO – The Institute of Internal Auditors

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Overview

• Global Financial Crisis: Impact on

Governments Worldwide

• Government Auditors: An Overview

• Mitigating GFC Impacts: Five Ways

Government Auditors can Add Value

• Conclusions

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We All Know the Problem…

• Revenues from sales tax, property tax, income tax,

and fees have declined

• Citizens need higher levels of government services in

times of financial difficulty

• Most OECD countries are running significant budget

deficits

• State/local governments must run balanced budgets

This means difficult and painful choices.

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Budget Squeeze

• Sales tax revenues down

• Property taxes down

• Income taxes down

• Investments down

• Fee income down• Increased use of social

programs

• Economic stimulus programs

• Automatic triggers (unbudgeted)

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h

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Recent Austerity Measures

Country Austerity Measures

Czech

Republic

Cut public sector wages up to 43%; taxes on pensions of high

earners

Greece Raise VAT from 19% to 23%; raise pension age; cut public

sector bonuses; freeze salaries/pensions; raise retirement age

Ireland Cut public sector wages 5%; cut 24,750 jobs; cut minimum

wage; reduce social welfare and child benefits; increase capital

gains, capital acquisition, and carbon taxes; new water tax

United

Kingdom

Raise VAT from 17.5% to 20%; reduce government department

budgets by average of 19%; raise pension age; cut 490,000

public sector jobs; reduce unemployment benefits

Source: Limiting Central Government Budget Deficits: International Experiences, Congressional Research Service, 2011

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The Status Quo is Unacceptable

• Rising public expectations for demonstrable

results and enhanced responsiveness

• Government performance/ accountability and

high-risk challenges

• Additional resource demands due to

economy, healthcare costs, terrorism…

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Government Auditors:

• Work for “good government”

• Help improve performance and assure accountability

• Help identify and mitigate risks

• Maintain independence to make difficult decisions

“With light comes heat, and with heat comes action, andaction is what we want. How can we make governmentwork better? By improving the economy, efficiency, andeffectiveness of government.”

T - The Honorable David M. WalkerFormer Comptroller General of the United States

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Audit and the Financial Crisis

• Two potential solutions:

– Control costs

• Traditional audit “sweet spot”

– Grow revenue

• Potential audit opportunities

• With change comes risk

– Increases need for audit

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Mitigating GFC Impacts: Five Ways

Government Auditors can Add Value

1. Providing assurance on the accuracy of financial

reporting

2. Providing assurance that government resources are

being used efficiently and effectively

3. Fostering accountability by government officials

4. Identifying opportunities for cost reduction and

containment

5. Fostering greater public trust

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1. Providing Assurance on the Accuracy of

Financial Reporting

• Generally accepted accounting principles

• Adequacy and accuracy of disclosures

• Privileged and confidential information

• Report distribution

Five Ways Government Auditors can Add Value

In today’s economy, financial reports are under intense scrutiny by public

officials, legislators, and citizens.

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1. Providing Assurance on the Accuracy of

Financial Reporting

• Financial audits include determining whether:

– Financial information is presented in accordance

with established or stated criteria,

– Entity has adhered to specific financial compliance

requirements, or

– The internal control structure over financial

reporting and/or safeguarding assets is suitably

designed and implemented to achieve control

objectives.

Five Ways Government Auditors can Add Value

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1. Providing Assurance on the Accuracy of

Financial Reporting

• Financial audits also evaluate:

– Poor financial management systems

– Corruption, fraud, fund diversions

– Use of reserves during unexpected events

– Inadequate funding

– Release of funds to Ministries/Departments/Agencies

– Initiation of spending

– Payment

– Recording of transactions

– Production of accounting/budgeting reports

Five Ways Government Auditors can Add Value

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2. Providing Assurance that Resources are

Being Used Efficiently and Effectively

• We need to know whether or not government

programs operate economically and efficiently

• We need to know which initiatives are showing

results and which are not

• We need verifiable evidence of success

Five Ways Government Auditors can Add Value

In today’s economy, government leaders need to know which programs are effective and which are not so they

can make tough choices.

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2. Providing Assurance that Resources are

Being Used Efficiently and Effectively

• During difficult economic times government auditors

can provide consulting services that will show if the

organization is conducting operations effectively

(meeting its goals) and efficiently (controlling costs)

– Services might include “management studies” that identify

opportunities for enhancing the efficiency of operations

Five Ways Government Auditors can Add Value

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3. Fostering Accountability by

Government Officials

• Public officials are responsible for:– Complying with applicable laws and regulations

– Using resources efficiently, economically, and effectively

– Establishing and maintaining effective controls to ensure that

appropriate goals and objectives are met

• Officials and employees who manage government

programs need to render an account of their activities

to the public

• Auditing provides objective evidence enabling us to

hold management accountable for key responsibilities

Five Ways Government Auditors can Add Value

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3. Fostering Accountability by

Government Officials

“In the last analysis, of course, an oath will encourage

fidelity in office only to the degree that officeholders

continue to believe that they cannot escape ultimate

accountability for a breach of faith.”

- James L. Buckley

Five Ways Government Auditors can Add Value

• Government officials should abide by a Code of

Ethics/Conduct and establish a culture for

preventing, detecting and reporting fraud and

corruption

“

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4. Identifying Opportunities for Cost

Reduction and Containment

• Lack of coordination among departments

• Inadequate cost information

• Substandard contract management

• Mission fragmentation/program overlap

• Ineffective procurement controls

• Poor planning

• Burdensome legal mandates

Five Ways Government Auditors can Add Value

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4. Identifying Opportunities for Cost

Reduction and Containment

• Scrutinizing processes can identify opportunities for

increased efficiency

• Encouraging adoption of performance measurement

systems can help departments focus their energies

and monitor quality and effectiveness.

• Advocating rigorous, data-driven decision making

processes can lead to better outcomes

Five Ways Government Auditors can Add Value

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5. Fostering Greater Public Trust

• Auditing provides credibility to the information

reported by or obtained from management through

objectively acquiring and evaluating evidence

• Audit of government reporting is an essential element

of public control

Five Ways Government Auditors can Add Value

In today’s economy, auditing provides transparency to meet the growing

demand for objective information about government programs and services.

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5. Fostering Greater Public Trust

“Citizens deserve to know that their state

government is spending their tax dollars

wisely on vital programs and services that

directly benefit them and make a measurable

difference in their lives.”

- Edward G. Rendell

Two-term Governor of Pennsylvania

Five Ways Government Auditors can Add Value

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Conclusions

• The status quo is unacceptable in times of global

financial crisis.

• A fundamental review of government programs and

policies is necessary to determine what the

government should do and how the government

should do business in the future.

• In times of financial crisis, internal audit is key to

assuring ongoing government efficiency,

effectiveness, and transparency.

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• For more information, contact:

Richard F. Chambers

President and Chief Executive Officer

The Institute of Internal Auditors

richard.f.chambers@theiia.org

Questions?