Most of my career has been in government, and I have the privilege of working for a variety of governments – federal and local. The stories I hear regarding governmental waste, fraud, and abuse are numerous, interesting, and sad. It is one thing for a business owner or corporation to lose their resources, but another when fraud consumes the resources that were destined to become school lunches, infant formula, military armor, or low-income housing. Did I get emotional enough for you? I do get a bit emotional about government. It helps me remember what my role, my higher purpose, is as a government auditor.
The 2007 version of the Yellow Book contains an introductory statement letter from David Walker, the then Comptroller General of the GAO. He says, in part:
“Current trends and longer-range fiscal challenges make auditor oversight especially important to help improve government operations and services today and position them for a better tomorrow. Government auditing plays a major role in improving government operations and services, and in the important dialogue on the future of government programs by providing the objective analysis and information needed to make the decisions necessary to help create a better future.“
When I was in public accounting, auditing a car parts manufacturer in Eagle Pass, Texas, my ultimate customer was the owner of the business or the banker who used the audit report. But when I audit a HUD project, a low-income apartment complex, whom is my customer? Not HUD, not the feds, state, or city, not the management of the housing project, not even the generic ‘taxpayer’. My ultimate customer is a 3-year-old toddler living in the complex with her single mother who works two jobs to keep the family together. Yep, emotional. But true.
The first lines of the Yellow Book standards say:
GAGAS 1.01 - Auditing is essential to government accountability to the public.
GAGAS 1.02 – The concept of accountability for use of public resources and government authority is key to our nation’s governing processes.
Did you know that you are key to our nation’s governing process? You are! Isn’t it nice to have a higher purpose?
GAGAS 2.07 – A distinguishing mark of an auditor is acceptance of responsibility to serve the public interest.
One city auditor has a personal mission that transcends the day-to-day work of auditing. He believes his ultimate goal is to make sure that the city’s resources are directed to those who don’t have a voice, to those who are disenfranchised and in need of help. Bravo! I am glad to know he is on the job.
On a recent visit to Jefferson County, just outside of Birmingham, my aunt warned my children not to get in or touch the pretty lake on which she lives. Why?
Well, in 1993, Jefferson County, Alabama was sued for contaminating local creeks with raw sewage. To fix the problem, the county issued bonds to finance water treatment facilities. The project has been plagued with corruption and the county commissioner was jailed in 2010 for accepting bribes. And to add insult to injury, an unscrupulous Florida investment banker talked the county into defeasing the bonds using a complicated swap. If the county hadn’t suffered from low tax collections in 2008, they may have staved off laying off 1400 workers in 2008. For a time, it appeared that the county would go bankrupt and default on the bonds.
No one, including the State of Alabama wants the county to go bankrupt! Birmingham is the state’s most vibrant city and a failure there would make Alabama look less appealing to investors and industry, so the initial $3 Billion dollars in bond debt was renegotiated and reduced to less than $1.4 Billion. Is anyone in government in jail for these poor decisions? Did anyone lose jobs? And who ate the other $1.6 billion? All of these mysteries may never be solved because so many were involved in the decisions.
Ew. Now I know why we weren’t to touch the water!
Fraud, waste, and abuse in government are of the worst sort. And because of the complexity of government and the vast array of services the government offers to its citizens, these losses are often absorbed into operations, and no one is held accountable.
Is it a matter of sophistication?
This isn’t an unusual story. I think a lot of it stems from a lack of financial and operational sophistication on behalf of these leaders and managers. This isn’t unique to government. While some of us seek to learn finance and how to manage, others avoid numbers like the plague. They say things like, “I have successfully avoided finance all of my life. My job is to provide services, do the real work, not worry about numbers.” When the number avoiders end up running our government, we run into problems.
Through a program called the “Certified Public Manager” program, I teach finance for non-financial managers, budgeting, and performance measurement courses. I teach and consult with a variety of governments, from large cities (San Antonio and Corpus Christi) to small villages (Dripping Springs and Salado).
Through my relationships with these government leaders, I have witnessed sophisticated investment bankers and bond traders talk governments into debt that they don’t need. I equate it to the offers I get weekly from credit card companies. They make money when I overextend myself on credit and end up paying interest and late fees. In no way are the credit card companies interested in my financial well-being; they are interested in their own financial wellbeing. Investment bankers, bond traders, the whole lot of them, earn a living by helping cities go into debt.
I am not saying that debt is bad, but an overwhelming amount of debt is. And the smaller governments do not have the financial knowledge or judgment to be able to understand what they are getting themselves into. I witnessed one mayor being wined and dined by bondmen who told him all the lovely improvements that could be made to his city if he issued debt. They made him think he was falling behind other cities by not having the amenities other cities enjoyed. But the fact of the matter was that the city did not collect property taxes and was barely making ends meet. The community was not wealthy nor did the citizens have high expectations. It was all a scam that – luckily – conservative city council members talked him out of.
I witnessed another small city, whose city hall was in a trailer down a dirt road behind a Sonic, take on millions of dollars in debt to improve their water treatment facilities. This town’s budget was written in a one page Word document. This debt eclipsed the rest of their operations. They were scared out of their minds to be responsible for so much money and had no idea how to properly account for it. These small governments are prime targets for wheeler-dealers in dark suits. Is that fraud? Not exactly. But I bring this up because I think we need to have some context here as we examine the litany of stories I was able to dig up about fraud in government.
Have you read the book Aftershock by David Wiedemer? He forecasts dark days for our economy as bubble after bubble pops, real estate, discretionary income, stocks, the dollar and finally the government debt bubble. Do you know that David Walker estimates that each U.S. Citizen owes $438,000 in debt as of 9/30/08 – and that is only at the federal level!
Governments are extremely complex. Consider a small city – say a suburb of Houston or Dallas. One small city is responsible for police and fire protection, courts, water and sewer, garbage disposal, inter-government relations, health programs, parks and recreation, an airport, financial reporting and budgeting, and on and on and on. This isn’t a job to be taken lightly, but I am afraid it sometimes is.
Is business immune?
Let’s not fool ourselves into believing that corporations are any better at running things. I have had the privilege of working at a half-a-dozen Fortune 500 companies and they all have their quirks and have all suffered from employee fraud.
My husband recently treated me to an Apple laptop – which I love by the way. I was under the illusion that a great product must be produced by a highly evolved organization. Then I saw an MSNBC business documentary about them. It turns out that they argue, and fail, and torment each other when they are creating products. Money and time is wasted and people get their feelings hurt and lose massive amounts of money. But, they create a great product in the end, don’t they?
And governments, with all of their faults, create great products and services for us. They pick up our trash, fix our roads, educate our children, respond in an emergency, and I could go on.
So take all of these stories with a grain of salt and don’t get too depressed. We are all only human after all. I know I am seriously flawed but notice I will not bring up many of my personal financial foibles in this text.
Alabama’s Jefferson county sees hope for debt deal, Reuters By Matthew Bigg, April 9, 2010