When companies invite an outside auditor to review their records, it’s generally considered a reassuring signal to lenders and investors. There’s nothing like a stamp of approval from a trusted third-party group of experts whose reputation rests on their reliability and credibility. That’s why it’s called “due diligence” and is a standard component of the mergers and acquisitions process to ensure transparency for all sides.
Many taxpayers and voters would be surprised to learn that this is not the case for the state governments that manage their tax dollars. Each year, states issue financial report cards to their citizens in the form of Comprehensive Annual Financial Reports (CAFRs.) After analyzing all 50 of these complex documents, only 15 state governments used outside audit firms to double check their work.
The remaining 35 state governments assign in-house staff to review their own filings — employees who are often hired and fired by their respective state auditors. This is a textbook case of conflict of interest, raising serious questions about the transparency and accountability of our budget processes.
Louisiana, Missouri and Nebraska use in-house accountants, and all three earned Qualified Opinions on their latest financial filings because of non-compliance with Generally Accepted Accounting Principles (GAAP). If these concerning findings are coming out of the in-house watchdogs, imagine what a truly independent CPA firm might uncover. New Mexico uses outside auditors and was the only state to receive a Disclaimer of Opinion — the accounting world’s “kiss of death.”
In addition to New Mexico, the 15 states using independent auditors include Delaware, Hawaii, Kansas, Maryland, Massachusetts, Nevada, New Hampshire, New York, Pennsylvania, Rhode Island, South Carolina, Vermont, West Virginia and Wyoming. That deserves recognition for commitment to public transparency.
Oversight by an outside auditor helps ensure that government financial statements are being presented fairly, fully and in accordance with standard accounting norms. It sends a message that state government respect their taxpayers’ money and handle it in a judicious manner. Outside analysis also helps governments make real improvements to public policy. Hawaii, for example, learned of seven “material weaknesses” and 17 “serious deficiencies” in their current bookkeeping system from an outside CPA. The first step toward correcting those shortcomings is knowing that they exist in the first place.
Elected officials owe it to their constituents to prioritize good governance over political expediency. Retaining independent auditors may expose mistakes or oversights in the short term, but it pays it forward for future generations who one day will have to contend with our current fiscal policies.
If we want to have a truly vibrant democracy, independent auditors also fit into the larger need for an informed electorate. It is impossible to cast knowledgeable votes about our elected officials without a clear picture of their financial report cards. Comprehensive, clear and transparent data is the bedrock of accountable government. Sometimes it takes an outside accountant to deliver the tough medicine.
Sheila Weinberg, CPA, is founder and chief executive officer of Truth in Accounting, a nonprofit organization that researches government financial data and promotes transparency for a better-informed citizenry. This analysis of the use of outside CPA firms comes as a part of Truth in Accounting’s forthcoming survey of transparency across the United States. Outside CPA’s are just one metric in the survey, which you can see it its entirety online here.