1. NSAA IT Conference http://www.apa.virginia.gov Outsourcing Audit Services: Virginia’s Privatization Study _____________________________________ October 2, 2013 Staci Henshaw, CPA Deputy Auditor of Public Accounts

2. NSAA IT Conference Presentation Goals Provide study background Discuss study methodology Summarize study results Share lessons learned http://www.apa.virginia.gov Page 2

3. NSAA IT Conference Why did we perform this study? http://www.apa.virginia.gov Page 3

4. NSAA IT Conference Proposed Statutory Changes A. The Auditor of Public Accounts shall audit all the accounts of every state department, officer, board, commission, institution or other agency handling any state funds. In the performance of such duties and the exercise of such powers he may employ shall procure the professional services of certified public accountants and auditing firms in accordance with the Virginia Public Procurement Act (§ 2.2-4300 et seq.), provided the cost thereof shall not exceed such sums as may be available out of the appropriation provided by law for the conduct of his office.2.2-4300 http://www.apa.virginia.gov Page 4

5. NSAA IT Conference Where did the idea for this bill originate? http://www.apa.virginia.gov Page 5

6. NSAA IT Conference Why is privatization popular? http://www.youtube.com/watch?v=Fcu_fn Xoc_I http://www.apa.virginia.gov Page 6

7. NSAA IT Conference What did we do in response to this bill? Met with Chairman of General Government Subcommittee –Was about to become chair of our oversight entity Requested that if this moved forward that the effective date be changed –Would have become effective on July 1 –Needed more time to contract for larger audits (CAFR / Single Audit) Offered to perform a study surrounding moving forward with this proposal –Received formal request from both the patron and chairman http://www.apa.virginia.gov Page 7

8. NSAA IT Conference Why did we offer to perform a study? This is not the first time this has been proposed Legislation from previous year had resulted in some audits being outsourcing Provided a good opportunity to highlight ALL the services the APA provides http://www.apa.virginia.gov Page 8

9. NSAA IT Conference Independence Implications? Goal was to provide information to the General Assembly to use to make decision on the proposal Asked for input from our state society of CPAs (VSCPA) throughout the process http://www.apa.virginia.gov Page 9

10. NSAA IT Conference Items we were requested to cover in our study http://www.apa.virginia.gov Page 10

11. NSAA IT Conference Study Methodology and Sources of Information Developed a comprehensive list of all the audit and non-audit services we provide –Reviewed the Code of Virginia –Surveyed management team –Utilized our work plan reports –Analyzed hours by audit type http://www.apa.virginia.gov Page 11

12. NSAA IT Conference What are APA Products and Services http://www.apa.virginia.gov Page 12

13. NSAA IT Conference Other Activities Code mandated calculations –Rainy day and local fines & fees reversion Comparative Report of Local Government Commonwealth Data Point Oversight of firms auditing local governments Fraud investigations Provide information to General Assembly members and staff http://www.apa.virginia.gov Page 13

14. NSAA IT Conference Study Methodology and Sources of Information Gathered data on our operations –Expenses, staff, and number of reports issued for five year period Requested information from VSCPA –Number of firms in Virginia in applicable practice areas based on their peer review program http://www.apa.virginia.gov Page 14

15. NSAA IT Conference APA Operational Data http://www.apa.virginia.gov Page 15

16. NSAA IT Conference 130 Active Firms Practiced in Virginia in Related Practice Areas http://www.apa.virginia.gov Page 16

17. NSAA IT Conference Study Methodology and Sources of Information Utilized procurement data from recently outsourced audits –Primarily to determine rates Interviewed other states NSAA –Auditing in the States –Contacts in other states http://www.apa.virginia.gov Page 17

18. NSAA IT Conference Interviews with other states Developed interview template with 20 questions –Extent of outsourcing –Contracting process –Contract monitoring / quality control –Costs –Availability of firms –Pros and cons http://www.apa.virginia.gov Page 18

19. NSAA IT Conference Extent of Privatization in Other States http://www.apa.virginia.gov Page 19

20. NSAA IT Conference Models Used by States Interviewed http://www.apa.virginia.gov Page 20

21. NSAA IT Conference VSCPA Input Had several meetings –Planning Phase –Report Phase They did not provide a formal response since we made changes to the report to address their comments - we noted this in our report http://www.apa.virginia.gov Page 21

22. NSAA IT Conference Study Results Report provided information from the original request Provided decision considerations and related decision points for the General Assembly to address when evaluating the different options associated with outsourcing –Decision considerations included information that was pertinent to the corresponding decision point and also included some “recommendations” http://www.apa.virginia.gov Page 22

23. NSAA IT Conference Key Points Recommended prior to moving forward the General Assembly first determine its overall objective for outsourcing Would help to provide a context for considering the various decision points, as some may not be relevant, depending on the objective Noted there were interdependencies between the various decisions points; therefore, they should not be addressed singularly http://www.apa.virginia.gov Page 23

24. NSAA IT Conference Key Points – Other Services Outsourcing could result in APA losing the depth of knowledge needed to advise the General Assembly –High risk areas –Impact of new accounting and auditing requirements Information Technology projects Would be more difficult for us to maintain Commonwealth Data Point –We obtain and validate data as part of audit process –Responding to inquiries http://www.apa.virginia.gov Page 24

25. NSAA IT Conference Key Points – Legislative Oversight Recommended that the legislature retain responsibility for audit oversight –Helps to mitigate some of the risks –Provides separation of hiring function from management (most agencies do not have oversight boards) http://www.apa.virginia.gov Page 25

26. NSAA IT Conference Key Points – Legislative Oversight Recommended Model 2 as the governance structure –State Auditor would oversee the contracting process - hiring and quality assurance monitoring –Model allows for economies of scale relating to the contracting function –Model best promotes accountability and independence –Model helps ensure audit quality http://www.apa.virginia.gov Page 26

27. NSAA IT Conference Key Points – Outsourcing Alternatives Pointed out challenges in performing CAFR and Single Audits –Coordination required among different agencies and auditing firms –Decentralized operating environment and internal control structure in the Commonwealth –80% of states either fully or partially perform these audits –We provide a separate report for each agency or Secretarial (included budget to actual data) http://www.apa.virginia.gov Page 27

28. NSAA IT Conference Key Points - Risks Identified State auditors focus on accountability (vs. profit motive of firms) Substantive vs. Internal Control Approaches We have extensive knowledge on Government Audit quality issues (National Single Audit Sampling Project) http://www.apa.virginia.gov Page 28

29. NSAA IT Conference Key Points - Benefits Identified Easier to manage staffing shortages and geographic challenges Large firms benefit from technical support /expertise from national offices May provide a “fresh” look at the entity Outsourcing gives State auditors more time to focus on special projects http://www.apa.virginia.gov Page 29

30. NSAA IT Conference Key Points - Transition Pointed out benefits of a phased-in approach –Firms may need to increase staffing and obtain training related to government auditing –APA needs sufficient staff and processes in place to perform the contracting and monitoring functions http://www.apa.virginia.gov Page 30

31. NSAA IT Conference Key Points – Audit Costs and Fiscal Impact Would need 25 staff if APA maintained oversight and some responsibilities Leaves approximately $8.2 million of $10.5 million budget Based on average rates from recent outsourcing, cost for entire work plan could be as high as $18.5 million http://www.apa.virginia.gov Page 31

32. NSAA IT Conference Estimated Cost Data Provided http://www.apa.virginia.gov Page 32

33. NSAA IT Conference Report Response – Patron of Original Bill Felt we should continue to perform the CAFR and Single Audit work Requested that we develop a list of other audits that could be outsourced and report back to him Communicated objective was to reduce costs http://www.apa.virginia.gov Page 33

34. NSAA IT Conference Report Response – Our Oversight Entity While presenting our annual work plan to our oversight entity we communicated the patron’s request Oversight entity felt there was already the opportunity for firms to propose to perform this work through our Public- Private Partnership process http://www.apa.virginia.gov Page 34

35. NSAA IT Conference Lessons Learned Be Competitive! –Innovation is important in being competitive (reduces costs and helps to identify issues) –Keep track of the extras for comparison purposes –Know how your staff spend their time and set goals Chargeable vs. non-chargeable http://www.apa.virginia.gov Page 35

36. NSAA IT Conference Lessons Learned Don’t turn down work! –But be careful to maintain independence Communicate all the services you provide! –We are now using our quarterly and annual reports to better communicate this information http://www.apa.virginia.gov Page 36

37. NSAA IT Conference Lessons Learned Maintain relationships! –With State CPA Societies –With legislative members and staff –With NASACT / NSAA http://www.apa.virginia.gov Page 37

38. NSAA IT Conference Report Link and Hours www.apa.virginia.gov/reports/CPAFeasi bilityRpt12-12.pdfwww.apa.virginia.gov/reports/CPAFeasi bilityRpt12-12.pdf Study actual hours = 175 http://www.apa.virginia.gov Page 38

39. NSAA IT Conference S TACI.H ENSHAW @ APA. VIRGINIA. GOV S TACI.H ENSHAW @ APA. VIRGINIA. GOV 804-225-3350 EXT. 352 QUESTIONS?? http://www.apa.virginia.gov Page 39