Fraud scandals, weak internal controls and growing financial complexity make the case for giving Minnesota’s elected State Auditor broader authority over public accounts.
By Noah McVay
I take issue with the latest installment in a recent series of op-eds published in MinnPost. Whether we like it or not, Minnesota is embroiled in a crisis of government accountability. We should not be attempting to minimize the scale of the problem or dismiss the very real concerns of Minnesotans up and down the state.
Earlier this year, federal agents terrorized our communities—including our schools and places of worship. Wittingly or not, they violated our fellow Americans’ God-given human rights, the same fundamental rights we fought and died for at Gettysburg and on the beaches of Normandy. Through it all, we had no third-party mechanism in place to independently investigate uses of deadly force by federal law enforcement. That should give each and every Minnesotan pause.
An entirely different beast is the set of compounding challenges facing the state of Minnesota and its local units of government. Our counties, cities, towns, school districts, and special purpose districts have been struggling since the pandemic to respond to budgetary instability, cybersecurity failures, nonprofit embezzlements, workforce shortages, the costs of excessive privatization, and underperforming essential services—mostly due to inadequate resources, training, and internal controls. And don’t get me started on our state agencies. Time and again, they have failed to implement adequate operational controls to prevent fraud in vital social services programs for decades.
Clearly, Minnesota’s government auditing arrangements—be they at the state or local level—are no longer fit for purpose. This really shouldn’t be a surprise. The last significant reform occurred way back in 1973. As Ben Franklin cautioned centuries ago, change is ever constant. Public finances are far more complex today than they were 53 years ago, thanks to multiple waves of fiscal federalism beginning in the 1980s that transferred daily administration of many federal programs to states and localities. But with smarter oversight, each of these risks can be contained and managed so that harm doesn’t befall our fellow Minnesotans.
Hence my call to action. At this critical hour, Minnesota needs an auditor of all public accounts. Not another inspector general focused singularly on fraud investigation, as passed by state lawmakers of all stripes. While well-intentioned, their legislation is deeply flawed. To the contrary, a statewide inspector general is ineffective at fraud deterrence and needlessly duplicative of scarce resources. What we truly need is an independent auditor directly accountable to the electorate, one with the power, duty, and authority to superintend, examine, and pass upon the fiscal concerns of the state of Minnesota and its 4,500 localities. Our duly elected, constitutionally mandated Office of the State Auditor (OSA) is that functionary.
Evidence supports my reasoning. Flasher et al. (2022) find that state auditors who possess combined responsibility for both financial audits of state agencies or local governments and investigations of public-sector fraud experience fewer corruption convictions of public officials due to their creating a stronger control environment. Conversely, standalone inspectors general—while more prolific in prosecuting fraud—are less effective in actually deterring it. Here are some more highlights:
• Cagle & Pridgen (2015) examined 81 Mississippi county governments. Their regression analysis indicates private-sector auditors report significantly fewer audit findings than do public-sector auditors. Results also reveal a significant increase in reported audit findings in the fiscal year following a change from a private-sector auditor to a public-sector auditor. Jakubowski (2008) arrives at a similar conclusion but concerning county governments in the state of Michigan.
• Lee et al. (2009) determined that state auditors enjoy the unique advantage of continuous supervision over the localities they audit, something which private accounting firms do not. This extended tenure affords them the opportunity to become better acquainted with the work of auditees and to provide management consulting services that reduce costs and improve business operations. These activities, in turn, reduce external audit costs and reporting delays.
• Nakhmurina (2024) finds that statewide monitoring of local public finances is “…associated with an increase in the proxies for reporting quality, a decrease in the number of corruption convictions, and a reduction in re-election likelihood for incumbent politicians.” Consistent with the purpose of statewide fiscal monitoring, Nakhmurina also demonstrates that fiscal health ratios of municipalities improve after initiating state monitoring. These findings dovetail with the fraud deterrence efficacy of integrated financial auditing and forensic accounting activities.
• Schelker (2007) generally finds that performance audits tend to be beneficial, and elected auditors with a broad audit mandate outperform other institutional arrangements, including legislatively appointed auditors. This is in keeping with the tenets of principal-agent theory, which is a central feature of auditor independence.
Stepping back, the truth is glaringly obvious. The next Legislature should confer on OSA the statutory responsibility of auditing the financial statements and federal awards of state agencies, counties, and cities of the first class, overseeing the quality of all other local governments’ financial reporting in partnership with private-sector accountants, and investigating fraud across the public sector. This is the norm in the vast majority of states. Additionally, OSA must integrate uniform minimum internal control standards applicable to all local governments into its annual legal compliance guide, as is done by chief audit executives in New York and Indiana. In so doing, OSA can more effectively identify and deter fraud across the public sector, especially as it relates to the transactions of vendors who deliver a growing share of public services under grant or contract.
My proposed reform does not in any way detract from the important work carried out by the Office of the Legislative Auditor (OLA). In fact, realigning Minnesota’s audit arrangements to meet the needs of the 21st century will allow OLA to refocus its efforts on performance auditing, be they operational audits of state agencies, information technology audits of the state’s cybersecurity infrastructure, or program evaluations of state and federal programs. This complementarian, dualist model of government auditing between an elected, partisan state auditor and an appointive, nonpartisan legislative auditor is actually commonplace. Indeed, it exists in the likes of Delaware, Mississippi, Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, Pennsylvania, Utah, Washington, and West Virginia.
Protecting the public interest shouldn’t end here, though. Integration of public-sector financial auditing and forensic accounting activities responds, at least in part, to Minnesota’s various fraud scandals. But these sorts of audit engagements are inherently reactive. They don’t proactively assess the strength and design of local governments’ internal controls, their compliance with applicable laws and regulations, the durability of their information systems in the face of cyberattacks, whether or not locally delivered services are achieving their stated objectives, or the extent to which localities’ operations are efficient and effective. That is the job of a performance audit.
Contrary to what current State Auditor Julie Blaha said back in 2022, Minnesota desperately needs a local government performance audit activity. After all, most public spending in Minnesota occurs not in the State Capitol but at the local level in our myriad county courthouses, city and town halls, schools, and special taxing district offices. Performance audits can help us address the many challenges facing our localities, examining topics as diverse as cybersecurity, education policy, environmental stewardship, fiscal stress, gender-based violence, human services program effectiveness, infrastructure and utility management, occupational fraud, school safety, support for first responders, and use of deadly force by local, state, or federal law enforcement. These are things at the local level of government that directly impact our lives every single day. For the sake of time, however, I will save further discussion of this important topic for the final installment in my long-running series of essays.
In the meantime, I want the big takeaway to be thus: The status quo is no longer working. Minnesotans desire and deserve meaningful reforms to our state and local audit arrangements so that our scarce resources are prudently managed, deployed in accordance with the law, and spent on programs which efficiently and effectively serve the common good. Evidence-based audit reforms can get us out of the quagmire we currently find ourselves in. Let’s not miss out on this golden opportunity to be innovative. On behalf of our kids and young people, the future of Minnesota, I urge lawmakers of all political stripes to think big.
Noah McVay (aka “Mr. M.” to his students) is a soon-to-be graduate of the Master of Public Policy and Administration program at Colorado State University, a Master of Accountancy student at Rutgers Business School, and a full-time substitute teacher who lives in Saint Paul. Outside of the classroom, Noah proudly serves all Saint Paulites as a community advisor to the Audit Committee of the Saint Paul City Council. Views expressed are the author’s own and do not necessarily reflect those of the Saint Paul City Council or its Audit Committee.
