During the pandemic, the federal government provided $4.6 trillion in funding through four COVID relief bills. But after reports of rampant fraud in the disbursement programs, the tide has turned toward more disciplined financial management.
As they gear up for annual financial audits, state and local government leaders must apply more scrutiny to their systems and processes. Preparing for internal and third-party audits is the most important initiative for a government controller and chief financial officer, but sprawling enterprise resource planning, or ERP, systems and complex financial transactions often make it difficult to track and account for government spend.
To “win the audit,” agencies should embrace a process-first and data-driven approach. This approach not only improves efficiency and effectiveness, but it also results in better data—such as reliable overviews of government assets, liabilities and spending—becoming available to the public. Here are a few ways agencies can adopt this strategy.
The vast majority of audit issues are business process issues. There are a few key processes that directly intersect with government financial audits and about which agencies can gather meaningful data:
Procurement: the procure-to-pay process that runs from purchasing to accounts payable
Accounts payable: the invoice-to-pay process involving invoice receipt, approval, documentation and eventual payment
Asset management: the acquire-to-retire process that extends from purchasing a product to its disposal when it is no longer needed
Financial reporting: the record-to-report process covering collecting, processing and presenting accurate financial data
As they prepare for an audit, agencies should shift to a process-centric approach and center their conversations around the end-to-end financial value chain instead of only financial statement reconciliation. For example, they can gain a deep understanding of outgoing cash by analyzing procure-to-pay and accounts-payable processes to determine the variants that cause the largest financial management issues.
A clean audit is well-documented and repeatable, so agencies must shift their approach from reactive to proactive and integrate audit readiness consistently throughout the year. This can take a few forms:
Before the audit: Build a real-time audit control tower to address data gaps from the previous year. Agencies should embed the audit control tower concept within the CFO’s organization to drive a data-driven approach to audit readiness.
During the audit: Initiate more productive and proactive conversations with auditors to talk about processes rather than transactions. An example is to consider the procurement-to-pay process while talking about purchasing approval deficiencies with an auditor.
After the audit: The audit control tower can rally the agency around a few common findings to drive business process improvement and automation projects that implement real-time spend controls.
Audit deficiencies tend to come in a few key forms: inaccurate financial reporting, inadequate systems controls and improper payments. Process intelligence and data science can help agencies address these deficiencies by visualizing processes from end-to-end and identifying where CFOs can make the most impactful remediations.
A holistic view of category spend, for example, can help agencies better understand the spend for programs that require a high level of budget transparency and prioritize solving issues within those programs. Separately, completing a data-driven analysis of historical and open payments can facilitate finding and reducing improper payments.
For example, a state government recently located an exception flag being used in its ERP system that circumvented the purchasing approval process causing over $100 million in improper spending. By examining and analyzing their processes, officials were able to frame the root cause within weeks and correct the problem.
Audit findings are difficult to respond to and often rely on multi-million- or billion-dollar ERP upgrades, but a data-driven approach to audit readiness is within reach. Unlocking financial process data allows agencies to proactively position their CFOs to win the audit and provide more efficient use of taxpayer money and better services for citizens.
Editor's note: This article was originally published by Route Fifty and has been republished with permission.