Battle over private audits nears climax

Listen to this article

A state law that went into effect in August has fans in county governments throughout the state — and one big detractor in St. Paul.

Last year, legislators passed a law allowing Minnesota counties to opt out of using the state auditor’s office for their annual financial audits, clearing the way for hiring private accounting firms instead. So far 44 of Minnesota’s 87 counties have done so in addition to six counties that previously had permission to use private auditors.

State Auditor Rebecca Otto filed suit over the law in February, claiming that it’s unconstitutional in that it threatens the balance of power in state government. Ramsey County Judge Lezlie Marek is due to rule on the suit soon. Otto’s office declined comment while the case’s outcome is pending, but she did tell reporters after a recent court hearing that “allowing the counties to reject the authority of the state auditor to carry out annual audits … is not only bad policy but it’s unconstitutional.”

Core function?

Annual audits of county finances are meant to ensure that proper internal controls are in place and that figures in county financial statements are accurate. “Conducting and overseeing county audits is not only a core function of the (Office of the State Auditor), it is the OSA’s primary core function,” Otto’s lawsuit read.

Many counties that have chosen to opt out of state audits have cited cost as a factor, saying they want the right to shop around. But Hamline University professor David Schultz said there might be more to it than the desire to watch every penny.

“Even in the best of circumstances, local governments and the auditor don’t have great relationships,” Schultz said. “The auditor is viewed as someone who sticks her nose into what the county is doing, and that creates an inherently adversarial relationship.

“It could be that counties are just more comfortable feeling like they have a choice in the matter.”

The suit presents a double threat to Otto’s office. Not only does it partially strip away the power to oversee county finances, but it also makes it costlier to work with the counties that do decide to stick with state audits.

“It gets worse as more counties pull out,” said Schultz. “When the auditor and her staff have all 87 counties to do, the cost for her office is cheaper than when she has only 30 or 40 counties to do. She has the same infrastructure as before, but now she has to charge more to do it.”

Some counties are happy

Just over one-third of Minnesota counties are sticking with state-run audits. Isanti County Auditor-Treasurer Chad Struss said he’s been happy with the state’s audits, which recently have run the county just under $40,000 per year on average. Struss said that some counties put together their own financial statements and do some of the auditing work in-house to save money.

“We’re a medium-sized county with limited management staff, so it’s nice to get that outside opinion,” Struss said. “They make good suggestions about possible changes we could make. The concern in other counties seems to be more about the cost than about the quality.”

Traverse County Auditor-Treasurer Kit Johnson said his county is also sticking with the state, even though the county board discussed opting out and his office has weighed alternatives.

“Private firms haven’t offered us much savings, if any,” said Johnson. “The thing I wouldn’t like would be jumping from auditor to auditor to save money. There’s a learning curve in the process, and you would be wasting each other’s time learning and teaching the process every year.”

Some counties have said they would entertain bids from the state for its auditing services, but Otto has said that wouldn’t work because the rate her office charges is set by statute.

The job of analyzing county finances has belonged to the state auditor since 1972. Schultz said that Otto’s argument that the job is a core function of the state’s executive branch — meaning it can’t be stripped away via legislation — could be a sound one.

“She’s got a pretty good argument in that, to the extent that the new law takes away some of her core functions as auditor, that might create a separation-of-powers problem,” said Schultz, who has taught constitutional law for two decades. “I’m not sure she’ll win necessarily, but that’s a strong argument she has on her side.”