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Why Minnesota’s local audit function is in trouble

Excessive privatization leads to an opaque control environment wherein policymakers and citizens have little to no knowledge of localities’ financial condition, the security of public asset, or the extent to which local spending delivers value to taxpayers.

Minnesota State Capitol
Minnesota State Capitol
MinnPost photo by Peter Callaghan

Earlier this year, I contributed an opinion piece discussing the importance of sufficiently funding and retooling the Legislative Auditor’s Office. Today, we need to have a frank conversation regarding local government auditing in the North Star State.

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Now to be fair, is local audit sexy? Does its mere utterance inspire revolution on the streets? Unless you’re an accountant, a local finance professional, or a public administration practitioner like myself — the answer is probably not.

But here’s why you should care as a citizen or taxpayer: Minnesota has approximately 3,600 counties, cities, towns, school districts, special purpose districts, metropolitan agencies and other political subdivisions which altogether spend about $64 billion annually. Property taxes, sales taxes, state aids and federal funds passing through state agencies are the predominant sources of revenue driving these expenditures. Putting things into perspective, local spending in Minnesota exceeds standalone state spending — currently around $55.498 billion annually — by a whopping 15.3%! We are not talking chump change, not by a long shot.

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The problem is, Minnesota has become incredibly lax in its oversight of local spending over the last two decades. While we have an elected state auditor charged with supervising and auditing local government finances, the auditor’s office is woefully under-resourced and stripped of reasonable statutory authority to keep an eye on taxpayer money. This is undoubtedly the result of consecutive budget cuts and the gradual privatization of the local audit function by the Legislature.

While outsourcing to private accounting firms does lead anecdotally to cheaper financial audits than what the office of the state auditor could ever conduct, privatization also generates significant costs. Case in point, evidence from the United Kingdom and throughout the United States suggests private audits are often delayed and of inferior quality when compared to those conducted by public sector auditors. In addition, privatization promotes an incomplete, fragmented regulatory landscape — one that creates gaps in public accountability and promotes fraud.

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In other words, excessive privatization of the local audit function ultimately leads to an opaque control environment wherein policymakers and citizens alike have little to no knowledge of localities’ financial condition, the security of public asset, or the extent to which local spending delivers value to taxpayers.

Minnesotans should find this troubling. Our local governments deliver — close to home — the most basic of public services, be it health and human services, education, transportation, potable water, solid waste, or public safety. Communities thrive and regional economies flourish only because of the operational reliability, political accountability and financial solvency of said services. We cannot afford as a state to let things slide when it comes to local spending oversight.

Setting matters of good governance aside, another problem associated with a privatized local audit function is its heightened vulnerability to any instability in the assurance services workforce — something both Minnesota and the wider United States are currently undergoing.

Indeed, according to the American Institute of Certified Public Accountants (AICPA), almost 75% of all current certified public accounts (CPAs) will retire in the next decade. The CPA shortage has already become so acute here in Minnesota that, as State Auditor Julie Blaha said in an interview with Cook County’s WTIP two months ago, some small localities in rural parts of the state have been unable to procure external auditors to audit their end-of-year financial statements.

To minimize the damage wrought by the looming CPA exodus, Auditor Blaha and the Minnesota Society of CPAs have proposed lowering CPA credential requirements from the current 150 credit hours to 120 credit hours, with the balance replaced by on-the-job training. While this policy alternative is well intentioned and would benefit accounting professionals of color and those from non-traditional backgrounds, changing CPA credentialing requirements at the state level is fundamentally bad policy.

For one thing, it will create burdensome restrictions for Minnesota CPAs and private accounting firms working across state lines, effectively unraveling the delicate interstate system that has allowed finance professionals to practice nationwide for over three decades. In a similar vein, governmental accountants and auditors may earn more than professionals in other fields, but they certainly don’t enjoy exorbitant salaries.

Public finance professionals will leave our state if paid less than what they are due as a result of Minnesota adopting non-conforming CPA credentialing requirements. Correspondingly, depressed pay will also disincentivize public accountants who train out of state from moving here to Minnesota. With all due respect to its advocates, lowering credentialing requirements will blow up the public finance sector. It’s fundamentally irresponsible.

Clearly, Minnesota should be designing policies that stabilize and ameliorate the auditor shortage, not selecting alternatives that will only further it. The Controllers Council encourages the development of coherent career advancement pathways to attract and retain accountants. In keeping with this objective, why not promulgate policies and implement programs that have a proven track record instead of worsening a wicked problem?

For example, the State Board of Accountancy could administer an intern-to-hire scheme for low- and moderate-income accounting, business, finance, and public administration students in partnership with private accounting firms that is modeled on Kentucky’s or Pennsylvania’s successful programs. In tandem, Minnesota’s Office of the State Auditor (OSA) could open up entry-level audit positions (with career advancement opportunities leading up to CPA licensure) to those undergraduate and graduate majors who have only taken intermediate accounting coursework. State auditors in Arizona, California, Massachusetts, New York, Ohio, Pennsylvania, and Washington, among others, all follow this hiring practice. Quite to the contrary, OSA requires entry-level applicants to have, at a minimum, a bachelor’s or master’s degree in accounting to even be considered for employment.

Noah R. McVay
Noah R. McVay
The stark contrast between the policy alternatives mentioned above speaks to a troubling pattern: Our state auditor’s office continues to operate as if it were still 1990, relying on exclusionary recruitment practices to attract and retain qualified staff and financial audits conducted by minimally supervised private accounting firms to provide oversight of hard-earned taxpayer dollars. It’s now 2023 — a moment in history when government fraud is more complex due to a dearth of adequately trained local finance staff, minimal or nonexistent internal control systems on the part of localities, and increasingly sophisticated cybersecurity attacks that threaten the integrity of sensitive data systems.

My fellow Minnesotans, the status quo is not working. We can and should do better. We can meet the local audit challenges of the 21st century head-on and, in so doing, make Minnesota a model that is the envy of the entire nation. What those reforms look like will be saved for a future essay.

Noah McVay is a resident of St. Paul and a master of public policy and administration student at Colorado State University. His research interests broadly encompass public budgeting and finance, program evaluation, compliance in the public sector, and machinery of government. He is particularly passionate about state and local government auditing practices.