Greater Opportunity Through Innovative Change

"The Murphy Commission recommends a fully independent audit of state government overseen by a bipartisan audit committee comprising a preponderance of members outside of state government's management and legislative sphere." (1998 Arkansas Policy Foundation Statement)

"Critics have noted Huckabee has presented no numbers backing up his claims." Arkansas Democrat-Gazette, April 23, 2003

INDEPENDENT AUDITS WOULD SAVE TAX DOLLARS

Little Rock-The 84th session of the Arkansas legislature is ending with a whimper, not a bang. Legislators are preparing to leave Little Rock without resolving key fiscal issues. Other matters like school finance are being postponed until fall. State government reorganization, once considered likely to win legislative approval, could be dead. The state Senate passed a reorganization plan in February1 but the House decided to appropriate $400,000 in tax dollars to "study the issue"--five years after the Policy Foundation made extensive recommendations that would have saved millions.

In 1998, APF reported the long-term growth in the number of state Boards and Commissions, employees and spending of tax dollars. Earlier this year, Gov. Mike Huckabee used APF's state government organizational charts-8-1/2 feet by 25-feet in length-to explain the reorganization plan passed by the Senate. The measure would have consolidated 53 state agencies into 10 departments before it was stalled in the House.

The Consequences of Ignoring Independent Audits

Opponents of reorganization contend tax dollar savings have not been identified. They overlook APF's 1998 recommendation proposing independent audits of Arkansas state government. A major private accounting firm (Deloitte & Touche) conducted annual audits of state government in the mid-to-late 1990s. APF noted (1998), "Over the course of the three audits, these three letters (to the governor and legislators) presented recommendations on reportable conditions in 27 state agencies or functional areas and recommendations concerning improvement or corrections to accounting, administrative, and organizational matters in 20 agencies or functional areas."

"The implementation of many of these recommendations could save the state millions of dollars and improve operations," APF noted. "The wording of many of these recommendations, over three years (1995, 1996, 1997) has remained exactly the same."

The Policy Foundation recommended independent audits, and establishment of a nonpartisan oversight group comprised of citizens with no connection to state government. The executive and legislative branches would each have had one representative on the panel. The recommendation was ignored. One consequence is illustrated by reviewing Deloitte & Touche's observations regarding the Arkansas Teachers Retirement System. The firm made more than a dozen recommendations including the following:

Observation: "Management does not monitor market values of investments in real estate."

Recommendation: "Obtain market value estimates on real estate investments periodically to ensure reporting compliance with GASB 25 (Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans)"

"Observation: All real estate owned by ATRS is managed by property managers who provide monthly income and expense reports to ATRS. These reports are not subjected to formal review by ATRS management."

Recommendation: "Develop and implement specific property manager report review procedures and document procedures performed."

Observation: "Alternative investments are becoming an increasing segment of the ATRS portfolio and, currently, ATRS does not have procedures in place to obtain or monitor the market values of these instruments and consequently cannot monitor related investment returns."

"Recommendation: Develop procedures to ensure that market values are periodically determined for these investments and that these market values are supported by verifiable data."

In 2001, media reports about ATRS' real estate investments contributed to a process that resulted in new management. Also that year, ATRS' use of "alternative investments," i.e., derivatives, resulted in a multi-million dollar loss in the Enron debacle. APF estimates more than $100 million would have been saved if the accountants recommendations (1995, 1996, 1997) concerning ATRS alone had been taken seriously and enacted. The retirement system was only one of 27 Arkansas state agencies or functional areas where reportable conditions were identified by the firm under standards developed by the American Institute of Certified Public Accountants. "Reportable conditions," the firm noted, "involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the State's ability to record, process, summarize and report financial data consistent with the assertions of management in the general purpose financial statements."

Independent Audits Could Assist Reorganization

Arkansas' weak economy makes state government reorganization essential. The proposal has the potential to save millions of tax dollars. Independent audits could assist this reorganization process. Some Arkansas department and agency heads, in the late 1990s, studied the accountants' observations and took remedial action. Today, the renewed use of independent audits would provide Arkansas citizens (and the executive and legislative branches) with the information necessary to make prudent decisions about state spending and management practices.

--Greg Kaza

. 1 'State Government Reorganization Passes Senate,' Arkansas Policy Foundation, February 2003.