FACTORS AFFECTING GOVERNMENTAL COMPLIANCE AUDIT FINDINGS: EMPIRICAL STUDY.

• Author: Branson, Leonard
• Position: Report

INTRODUCTION

Governmental Audits exist to ensure efficient and effective achievement of the objectives assigned to an agency by the enabling legislation. Furthermore, such audits substantiate that governmental entities are acting in such a way that no laws, rules, regulations or contracts are violated; and that citizens, employees, stakeholders and the public are not negatively impacted by the agency's practices. Audit procedures can positively influence the efficiency and effectiveness of an entity's policies and processes. Requirements concerning audits of organizations were put in place to set a standard for professional practice. Proper internal control policies and practices are just as important to government entities as they are to business entities.

The U.S. Government Accountability Office has issued "Standards for Internal Control in the Federal Government" (The Green Book) to set internal control standards in the federal government (U.S. Government Accountability Office, 2014). "Generally Accepted Government Auditing Standards" (GAGAS), or the "The Yellow Book," provides guidance for the auditing of government entities. GAGAS requires periodic audits of governmental entities including audits of the financial statements and an entity's compliance with applicable laws, rules, and regulations. Auditors are required to consider an entity's internal controls over financial reporting and compliance (U.S. Government Accountability Office, 2011).

Auditing of state entities provides reassurance to legislators, citizens, agency officials, and other parties that the agency is properly fulfilling its obligation by following applicable rules and regulations. According to the Illinois Office of the Auditor General (OAG) website, "The Auditor General is required by the Illinois Auditing Act to conduct, as is appropriate to the agency's operations, a financial audit and/or compliance examination of every State agency at least once every two years" (Illinois Office of the Auditor General, 2017). In addition to Financial and Compliance Audits, the OAG is responsible for Performance Audits, Information Systems Audits, and the Statewide Single Audits of Illinois state entities (Illinois Office of the Auditor General, 2017). State entities include all agencies, commissions, boards, state universities, and other state government entities or funds.

Compliance audits are one mechanism available to provide assurance to citizens, state legislators and others interested in the performance of state agencies that those organizations are performing their mandated duties and are operating within relevant laws, regulations, and contractual responsibilities. Compliance audits highlight operational deficiencies enabling legislator and citizen review of the state agency performance. Compliance audits of governmental agencies focus on evaluating operational deficiencies as well as suggesting operational improvements.

This helps ensure the government agencies are operating efficiently as well as performing their statutory duties as prescribed by the legislature (Illinois Office of the Auditor General, 2013). Because the compliance audit is one mechanism by which legislators and citizens may gauge the efficiency and compliance of the operations of various state agencies with applicable laws and regulations, the quality of the audit is an important consideration. Thus, audit quality reflects the degree to which the findings of the compliance audit provide a reliable reflection of the agencies' actual adherence to the applicable regulatory parameters.

In Illinois, the Office of the Auditor General (OAG) is required to perform compliance audits on state agencies at least every two years. As with any audit, auditors must be knowledgeable about the agency under examination, applicable rules and regulations, and possible weaknesses existing within an agency. When an item of significant noncompliance is discovered, it is considered a "finding" and it is disclosed in the audit report. Each audit report lists the total findings, repeated findings (findings from the previous audit that have not been corrected), and prior findings not repeated. All current year findings include observations made by the auditor during the audit, the criteria governing the item, and recommendations for correcting the noted findings. All audits are released to the public through the OAG website (Illinois Office of the Auditor General, 2016)

The Auditor General is responsible for the audit of state entities. The limited size of the OAG's staff, dictates that it is not possible for the OAG to complete all of the required agency audits each year. The Auditor General's Office may use the staff auditors at the OAG or alternatively, may elect to subcontract Certified Public Accounting (CPA) firms to perform compliance audits as a 'Special Assistant Auditor' (SAA) (Illinois Office of the Auditor General, 2016). This allows the OAG to avoid large staffing fluctuations while also completing the necessary audits.

It is very important that compliance audits efficiently uncover audit exceptions so that corrective steps may be implemented in a timely manner. Previous studies have provided limited evidence of the relative numbers of audit exceptions by type of auditor and several control variables that are also influential on audit findings. It is important to study this phenomenon over time to determine if the state governmental auditors and the Special Assistant Auditors are becoming more proficient at uncovering findings. This study focuses on examining an additional variable that may possibly be influential to the number of audit findings uncovered, as well as extending the data set of Branson, Decker, and Green (2011), Branson, Nation, and Clark (2016), as well as Branson, Nation, and Stephens (2016).

LITERATURE REVIEW

Compliance audits of state governmental agencies involve auditor examination of non-financial data related to the agency's mandated duties, adherence to laws, regulations, and contractual responsibilities (Branson, Nation, & Clark, 2016). A 2006 publication by Institute of Internal Auditors (IIA) regarding the role of auditing in the public sector states that effective public sector audits improve governance by increasing information available to the citizens of the state providing for agency accountability. Government audits provide a valuable resource to the citizens by ensuring agency compliance with the policies, laws, rules, and regulations, and that government operations are performed in the manner intended (Institute of Internal Auditors, 2006).

This information provides for better oversight of state agencies by informing legislators and citizens whether a government agency's current operations conform to the mandated requirements. Audit information also provides legislators and citizens with insight on how effectively the agency operates by providing perspective into what the governmental unit does well or poorly. Finally, audit information addresses possible future challenges or trends that the government may face, providing the foresight to suggest changes addressing future operations of the unit.

Aikins (2011) examined government's internal audit role in improving financial performance. The mixed-methodology study examined the role of the internal audit function by sampling 179 local governments that were all members of the Association of Local Government Auditors (ALGA). The study used survey data collected from audit directors, combined with data from...