What’s an operational audit? And does Ocoee need one?
Ocoee mayoral candidates George Oliver and Chris Adkins have called for operational audits to assess the city’s financial health. VoxPopuli asked accounting experts what they're all about.
The concept of an operational audit has become something of a political football as Ocoee mayoral candidates Chris Adkins and District 4 Commissioner George Oliver III suggested the city wasn’t doing enough to verify its financial house was in order.
In an interview with VoxPopuli, Adkins said the comprehensive annual financial report that the city submits to Tallahassee does “the bare minimum the state requires.”
Oliver has called for an operational audit for several years, asking that the $50,000, which the city commission earmarked in 2018 for such an evaluation, be used. (City Manager Robert Frank said at a recent city commission meeting that the audit hadn’t been done because the scope had never been defined.) At the Feb. 16, mayoral forum hosted by the Woman’s Club of Ocoee, Oliver again said an audit was necessary because he wasn’t sure “how money flows in and out” for the city’s long-running Ocoee Music Festival (formerly Founders Day). He also alleged that the festival has “mismanaged and misused” community redevelopment funds.
At a Feb. 15 political forum for other city races, Scott Kennedy, who’s running for District 1 city commissioner, said several political candidates were spreading “misinformation” about the city’s financial practices. “I’ve heard people say we should have an operational audit to see where the money goes,” he said. Kennedy is a certified public accountant and chief financial officer for an Orlando building materials supplier. “A financial audit is an audit that sees where the money goes. We have that in the city.”
What does Ocoee do?
The city files a comprehensive annual financial report with an external audit, which was most recently conducted by the independent Orlando accounting firm McDirmit Davis.
The state government requires all municipalities with more than $250,000 in revenue or assets to file such an audit, said certified government finance officer Lynda Dennis, a former University of Central Florida professor of government and nonprofit accounting.
However, Oliver has maintained that this just demonstrates that Ocoee, for instance, has balanced its numbers. That is somewhat confirmed by W. Robert Knechel, University of Florida distinguished professor of accounting.
“The financial statement audit is not specifically designed to guarantee that you would capture malfeasance,” he said in a phone interview. “The financial statement audit is focused on whether the financial numbers are actually accurate or not.”
So, could an operational audit tell Ocoee residents more about the financial stability of their city? We asked accounting and auditing specialists to weigh in.
What does an operational audit do?
The term “operational audit,” has become somewhat outdated, although that’s how it’s still referenced in the state statutes, said Derek Noonan, a state audit manager with the Florida Auditor General in Tallahassee. These days, the audit is better known in accounting circles as a “performance audit,” he said in a phone interview. The focus is on how things get done rather than just confirming the balance sheet.
It’s much more of an “intangible thing than numbers on a financial statement,” said UCF’s Dennis.
The operational or performance audit is used to evaluate departments, programs, projects, events to ensure they are being managed efficiently and effectively and that resources are being used responsibly. “Instead of looking at numbers, you're looking at process, policies, procedures, compliance with laws, rules and regulations, that kind of stuff,” Noonan said.
Last year's operational audit of the city of Gainesville, for instance, found that the finance department staff lacked the "knowledge and capability" to compile financial statements, which added to the cost of their preparation.
Among the 18 findings of the audit, which had been driven by constituent complaints and mandated by the Joint Legislative Auditing Committee: the city's power utility had amassed an unacceptable level of debt, compared with other cities; certain youth programs lacked transparency, oversight and accountability; controls around travel expenses, city credit cards, and background checks, needed "enhancement."
Knechel said an operational audit to verify a city's financial well-being can be valuable. “It’s often the case that city leaders don’t know what they don’t know,” he said. “Most elected officials are coming from something other than experience in accounting or running a city, so they may not even be aware of some of the questions they should be asking.”
Although such audits can range in cost from $70,000 to $300,000 said Noonan, they can add value depending on a municipality’s goal.
“As long as there's some kind of objective criteria to measure against, whether it be a law, a city policy or procedure, an ordinance, a resolution, a best practice, you could pretty much audit it,” he said. “The key is to know what you want before you contract for it so you don’t run up billable hours for something you don’t want.”
What about mismanagement or fraud?
VoxPopuli shared Ocoee’s 2021 annual comprehensive financial report with the accounting experts interviewed for this story. They all said the same thing: the city received a clean report with no “material differences” between what the city reported and what the auditors checked. That means everything looked kosher. However, the audit is designed to evaluate whether the information presented is reliable. It’s not designed to ferret out fraud, says Knechel.
The city’s independent accounting firm, McDirmitt Davis, makes clear in its report that the audit is “not designed to identify all deficiencies.”
“All they are doing is looking at financial statements. They’re not issuing an opinion on whether the city is well run,” Dr. Julia L Higgs, an accounting professor at Florida Atlantic University, said in a phone interview. “For example, if somebody goes to the Four Seasons and spends $2,000 on a room, on the financial statement, it goes to travel expenses. If they go to the Hilton and spend $250, that's travel. To the auditor, that's correctly classified. But a stakeholder may say, That’s abuse if it’s $2,000 for hotel rooms.”
Noonan with the Auditor General said that when fraud is detected, cities can then conduct what’s called a forensic audit to “put the whole story together, find out how much fraud there was, how long it was going on and what the dollar impact is.”
What's the bottom line?
Dr. Jim Moyer is an Ocoee resident who routinely attends city commission meetings. A former internal auditor for the Commonwealth of Pennsylvania who maintains his Pennsylvania CPA license, Moyer gave a brief presentation on audits during Ocoee's March 7 City Commission meeting in which he "recommended a better understanding of auditing before ... doing or not doing a type of audit."
In a Thursday phone interview, Moyer said that the question of an operational audit "involves a lot more study and information to make such a determination."
He would like to see the city put together a study group comprised of city staff and outside experts to examine whether an audit is warranted before spending the money.
"The need for improvement has to outweigh the cost," he said.