Amid legal battle over state auditor’s role, 44 Minnesota counties opt to hire private firms to review finances

MinnPost photo by Briana Bierschbach
State Auditor Rebecca Otto argues the Legislature violated the separation of powers and infringed on the core responsibilities of a constitutional office.

More than half of Minnesota’s 87 counties want private accounting firms to check over their financial records instead of the state auditor, according to notices sent to the office.

Counties have had that option since a controversial 2015 law change, which allows the local units of government to be audited by certified public accountants instead of the state auditor. The auditor’s office, which is enshrined in the state’s Constitution, has been reviewing county books since the 1970s. Before the change, only six counties — including the state’s largest, Hennepin County — had the option to seek private firms. 

Under the new law, which took effect on Aug. 1, counties had to provide written notice if they planned to stick with the auditor or go a different route. By the deadline, 44 counties had notified the state they would be using a private firm. 

The change is currently being challenged in court, where DFL State Auditor Rebecca Otto argues the Legislature violated the separation of powers and infringed on the core responsibilities of a constitutional office. Counties, on the other hand, say the power to audit local governments is not a core constitutional function of the office, but was actually directed to the auditor by legislators back in 1972. 

Otto said she’s waiting on the ruling from Ramsey County Judge Lezlie Marek, who previously denied a motion from counties named in the lawsuit to dismiss the case. 

“Right now we are waiting for the judge’s decision. That’s what the judicial branch does for us. If there’s confusion with a law, that’s what they are here for,” Otto said. “I took an oath to defend the Constitution and that’s what I’m doing.”

The auditing change was passed in the final hours of the 2015 session, when it was tucked inside a large state government funding bill. In the lawsuit, Otto said the new law could make it difficult to retain quality auditors going forward, but counties say CPA audits will help them save money and time. On average, a state audit costs about $50,000 for counties, but some have already signed contracts with private firms for cheaper audits.

If the courts reject Otto’s case, she said she has the option to appeal. With the possibility of a drawn-out legal battle, there could be plenty of confusion about who’s supposed to be auditing whom. 

“I contend that we continue to have the authority to audit these counties,” Otto said. “There’s been confusion that has arisen, which I told the Legislature was going to happen. I testified in committee that this would cause chaos.”

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Comments (17)

  1. Submitted by Richard O'Neil on 08/11/2016 - 05:22 pm.

    “I took an oath to defend the Constitution and that’s what I’m doing.”

    Good for you Ms Otto. The role of a State Auditor is coming from a different perspective than the one who is hired by the county. Auditors are indeed influenced by the person who is paying the fee.

  2. Submitted by Tom van der Linden on 08/11/2016 - 07:22 pm.

    Private auditors have built-in conflict

    Having observed private audit reports of schools and cities for more than 20 years as a local government reporter, I learned that private firms do a relatively decent basic audit -however, they tended to “soft soap” the minor problems they occasionally found. Generally, they also found only the most minor problems. the big ones, such as embezzlement, they blithely dismissed, noting that their letters of engagement – which read a little bit like those confounding software licenses we all agree too – did not cover fraud or abuse. The best way to combat serious fraud like that is to break up the accounting into several roles, but few local governments want that expense, and their auditing firms never insist on it, because they are always “pleasing the customer” – the outfit they are auditing.
    A state audit – while no doubt not perfect – is at least an independent audit. That is something no “hired gun” private firm can offer.
    The answer could be compromise – let counties have a private audit 2 out of 3 years, and a full state audit every three. Only problem: even less of a chance to catch the gambling-addicted employee who is working the system.

    • Submitted by Bill Schletzer on 08/12/2016 - 06:27 am.

      There’s an inherent conflict of interest….

      ..in paying someone to uncover your illegal or abusive activity. What private auditor will throw away a big account to uncover fraud by the person who hired him or her.

      • Submitted by RB Holbrook on 08/12/2016 - 01:29 pm.

        Especially . . .

        . . . in smaller communities, where business is always done between friends, neighbors, and cronies.

        • Submitted by Paul Bade on 08/12/2016 - 11:17 pm.

          Not necessarily

          In a non-government corporation, the elected Board of Directors (or more specifically, an audit committee comprised of independent directors who hold no position within the corporation outside of the Board). recommends the auditors, and the shareholders (owners) ratify the selection. The people working at the corporation have no official role in hiring the auditor, thus the auditor is answerable to those who need to be protected against improper accounting.

          The body of County Commissioners is the equivalent of a Board of Directors, with some direct executive oversight duties added. Likewise, at the very least, as elected representatives of the County’s citizens, the Commissioners should be the ones to choose the auditors. Since the Commissioners are somewhat more closely tied to the operations of the county than a typical Board of Directors, we probably should specify that the choice of auditor must be ratified by referendum at each general election, just as a business corporation does at its Annual General Meeting.

          • Submitted by Jackson Cage on 08/16/2016 - 07:44 am.

            That’s the textbook answer

            but in reality, Boards, shareholders and “workers” are often one and the same, or closely connected. And that’s why things are ripe for fraud.

      • Submitted by Bill Willy on 08/13/2016 - 12:13 pm.

        Speaking of smaller communities

        Do the “rounding errors” of cities or towns show up in the audits of the counties in which they’re located? Would the CPA firm doing a county’s audit be capable of and responsible for tracing them back to their source? How, for example, would Washington County’s (private) auditor have handled something like this if Justin Boyer hadn’t been on the council or if he had been disinclined to speak up?

        “An audit has found a $13 million shortfall in Lake Elmo’s revenue — confirming charges made by council member Justin Bloyer . . . Bloyer was censured — twice — by the city council for pointing out the mistake and accused of embarrassing the city finance director. But a company hired to recheck the numbers has found a discrepancy of $13 million — which is even more than the $11 million error that Bloyer originally spotted.”

        http://www.minnpost.com/glean/2016/07/duluth-parents-sue-school-district-over-son-s-suicide

        And how many Lake Elmos might there be in MN’s 87 counties?

  3. Submitted by Ron Gotzman on 08/12/2016 - 09:25 am.

    Please…

    Maybe Auditor Otto should campaign for a new law that demands that all counties be subject to State audit.

    Those who have commented on possible “corruption” because of the use of private audit firms have remained silent (including R Otto) over many years concerning select counties using the private sector.

    With less work, R. Otto can now spend even more time campaigning for higher office at the State Fair. Oh – I am sorry – she already does that.

  4. Submitted by Frank Phelan on 08/12/2016 - 09:48 am.

    Fueled By Pettiness

    This is fueled by a few legislators who got their undies in a bunch over a completely unrelated matter.

    What a waste.

  5. Submitted by Howard Salute on 08/12/2016 - 01:18 pm.

    Auditor is out of step

    “Before the change, only six counties — including the state’s largest, Hennepin County — had the option to seek private firms.”

    And if it was legal and acceptable for the six counties…why not all counties?

  6. Submitted by Michael Hess on 08/12/2016 - 02:26 pm.

    What’s the partisan breakdown of these counties?

    I’m just curious of the 44 counties opting for the option of a private auditor, how many of these counties are led by Repubican vs Democrsts?

    • Submitted by Tim Scholtes on 08/13/2016 - 12:16 pm.

      6 exempted counties

      I’ll bet the 6 exempted counties are generally run by the Liberals. The other 44 counties aren’t the issue. It’s the six that got an exemption in violation of equal protection/treatment under the law.

      • Submitted by RB Holbrook on 08/15/2016 - 10:02 am.

        “Equal Protection”

        The last time I looked, “equal protection” applied to individuals, not units of government.

  7. Submitted by Tim Scholtes on 08/13/2016 - 12:13 pm.

    What was illegal

    Allowing 6 counties to opt out certainly seems to be the part of the law that was illegal or corrupt.
    I’m not buying that a private firm has any less incentive to find or expose embezzlement.
    Certainly as a non-state agency they would never recommend overturning the apple cart for someone stealing pencils, but they wouldn’t want to be found to be part of a cover-up protecting higher ups within a county just to retain the business. They could end up serving prison time.
    The real problem is the cost and inefficiency of the state audit (there not going to find anymore problems than anyone else) and the fact that the previous law violates “equal protection” by allowing some larger populated counties to opt out should have sent up red flags. If the offices auditing function is so important they should have closed this loophole that may have been only helping like minded people in those counties. We don’t trust rural counties, but we trust the Liberals in Hennepin county to police themselves?

  8. Submitted by Jeffrey McIntyre on 08/16/2016 - 07:01 am.

    Audits

    A simpler solution might have been to allow the counties to choose the auditor of choice, and then allow the State Auditor’s Office to spot check the accuracy of those audits. Not much different than my corporate experience…internal audits are performed with internal staff, then the BOD chooses an external audit firm to affirm the accuracy of those internal audits. But I guess that would have made too much sense.

    • Submitted by Jim Million on 08/16/2016 - 01:30 pm.

      Indeed…

      It would then be interesting to review a list of which private firms did have some level of conflict in client, as well as those that did or did not perform up to standards.

    • Submitted by RB Holbrook on 08/16/2016 - 02:31 pm.

      Or . . .

      Just say that the auditor cannot be located in the county being audited. That could avoid the interlocking business/social/political networks of a small community.

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