Who audits the State of New Jersey?

This blog post sprung from a discussion among members of the New Jersey Society of Certified Public Accountants at a meeting this week that carried over into online discussion. I present the topic with a focus on our local area of Cumberland County.

New Jersey has 1,900 separate governmental units that are required to have annual audits. The purpose of an audit is to provide an objective independent examination of the financial statements of the government entity, which increases the value and credibility of the financial statements produced by management, thus increase public confidence in the financial statements. From a layman’s perspective, audits decrease the risk of ongoing fraud.

The quality of an audit is directly related to the auditor who performs the work. The accounting profession has well-developed standards for this field. The question was raised “Who audits the State of New Jersey?”. Insight is available from a 2008 report by the Comptroller that gathered responses from about half of the state’s governmental units.  The report titled “Selection and Use of Audit Firms by New Jersey Government Units” provides a useful overview. It also indicates:

1. About half of all entities have used to same auditor for more than 10 years. (The likely reasons for that and its risks are discussed in the report).
2. South Jersey government units are heavily represented in those that used the same auditor for more than 35 years. Cumberland County was one of those.
3. About half of the governmental units have no type of competitive bidding process for the auditing work.
4. Most audits are performed by only ten accounting firms.
5. Eights of the ten accounting firms make significant political political contributions.

The entire State of New Jersey is required to monitor its financial compliance and internal controls. The Office of Management and Budget publishes a Single Audit Report for the State of New Jersey. The reports for years 2012 through 2018 are available online. For years prior to 2107 the audits were performed by KPMG. For 2017 and 2018 the audits were performed by Clifton Larsen Allen. The state auditor only offers an opinion on the financial statements, not on internal controls or compliance. One accountant noted that the number of findings by the two auditors is remarkable. A “finding” indicates a failure of internal control or a deviation from standard procedure. A finding might also indicate a risk.

2015 KPMG  – 52 findings

2016 KPMG – 35 findings

2017 Clifton Larsen Allen  – 5 findings

2018 Clifton Larsen Allen  – 19 findings

These audits do occasionally result in corrective actions of deficiencies. I have very little personal interaction with the New Jersey government audit practice but can add a few anecdotal experiences from my own community of South Jersey:

• I had one private conversation with an auditor of a local governmental unit in South Jersey that is generally known to be lax on management procedures. His exact comment was “I’ve never seen anything like it”. I did not read the report and am unfamiliar with the issues, but I noted and remembered that the auditor’s ‘off-the-record’ comment to me in a CPA event business setting was remarkable.
• I attended a public meeting where an elected official misrepresented the findings of the auditor.
• A post-Sandy audit of local FEMA funding found serious deficiencies and recommended corrective action that could have have significant consequences to taxpayers.  I’m not aware that any such corrective action was taken.

In short, my local experiences left me with the impression that financial management standards vary significantly and lag in the rural sections of South Jersey. That seems to be reflected in the audit reports yet it is not clear that the reports have been used to initiate any corrective actions.