Month: February 2019

Metro Internal Audit – Collier and MNPS reports

The Metro Audit Committee meets next on February 12. We will consider the Metro Auditor’s reports about Collier Engineering and various allegations related to MNPS. Both are getting media attention and I think it is appropriate for me to comment transparently.

In connection with two investigation reports in 2018, I said in Audit Committee meetings that I think the internal audit department findings were inadequate. To put a finer point on it — I think the internal audit reports on investigations recently have pulled punches and sought to move on rather than fully address the allegations.

If you want to read more info about my thoughts about the internal audit function generally, read this.

In connection with Collier, I think the supplemental report we will consider this week is inadequate. Regarding the MNPS investigation report, I don’t have an opinion yet. (It’s voluminous, it came out just a few days ago, and I just haven’t gotten through it yet.)

On Collier…here is the basic internal audit timeline…

The Auditor’s initial report was issued on October 26, 2018. That version doesn’t seem to be online any longer. The Audit Committee discussed this report at our November 27, 2018 meeting. I thought the report was inadequate and I made six motions asking for the report to be supplemented and updated. You can see the motions on pages 9 and 10 of this package. The motions passed unanimously and that sent the Auditor back to work further. For context, in 3+ years on the Audit Committee, this was the first time we ever did anything like this.

The Auditor’s supplemental report is dated January 24, 2019 (although it wasn’t posted online until January 30, after I asked about getting it online).

I consider the supplemental report to still be inadequate. My email to the Auditor dated January 30, 2019, explains my reasoning. The summary is that I think the supplemental report is holding back and downplaying the seriousness of the evidence. I’ll continue to ask these questions at the Audit Committee meeting on Tuesday.

And MNPS…

The Auditor releases a 69 page report about various allegations related to MNPS a few days ago on February 6, 2019. As I mentioned above, I haven’t had the time to dig in on this the same way that I have done with the Collier reports.

I know two things at this point.

First, I currently do not have full faith in the willingness of Metro’s internal audit function to shine the right amount of light on alleged bad acts.

Second, I know there are people asking good faith questions about issues related to MNPS. As just one example, I saw that yesterday Phil Williams put out a 74 tweet opus about these allegations and the audit report. I’ve only skimmed his tweets, but it looks like he’s asking some of the same questions that I have about the willingness of the internal audit function to shine a bright line on controversial topics.

I have got a full schedule between now and the Audit Committee meeting at 4pm on Tuesday. I’ll try to get through this report by then. If I don’t, I’ll ask the Audit Committee to push off considering this report until our next meeting. I am not sure we can expect any of the committee members to meaningfully get through this important report in just 3 or 4 business days.

General thoughts about Metro’s internal audit function

I’ll warn you right now…this post will be hard to keep interesting. But as Metro’s Internal Audit function has been more in the forefront on issues like Collier Engineering, various MNPS allegations, and looking into the former mayor, I need to get some thoughts out. In this post, I’m going to cover some basic information about Metro’s internal audit function, what traits I think make for successful internal audit, and then some areas of possible improvement. If I have time today, I plan to work on a second post about the ongoing Collier and MNPS investigations being conducted by the Internal Auditor.

Here are some basics:

  • The Metro Auditor is set up under the Charter to be independent. The Auditor serves an 8 year term. I believe (but am not sure) that the current term runs through 2022. The Auditor reports to but is not controlled by the Metro Audit Committee.
  • The Metro Audit Committee has 6 members, who are the Director of Finance, the Vice Mayor, two Council members selected by the Council, a person chosen by the Nashville Area Chamber of Commerce, and a person chosen by the Nashville Chapter of the Tennessee Society of Certified Public Accountants. Council Member John Cooper and I are the two CM’s picked by the Council to be on the Audit Committee.
  • There are three key functions for internal audit — work with the external third-party auditors in preparing Metro’s annual financial audit, conduct periodic internal audits of Metro’s key functions, and conduct investigations as necessary of allegations of wrongdoing that impact Metro’s finances.
  • Two of these functions are predictable. Working with external auditors on the annual financial audit and conducting periodic internal audits of each department can be scheduled easily at least a year in advance.
  • The third main function — handling investigations of alleged wrongdoing — is not predictable. Sometimes, there’s not a lot of this. Sometimes, there is a lot to do.

What does it take to be a good internal auditor?

My basic description is that you want someone who has good accounting experience, a very practical operational understanding of the government, and a willingness to call out bad acts when necessary. It’s critical to be well-balanced with these traits to be successful. For example, without a solid, practical operational understanding, internal audit findings tend toward being over-careful and unworkable. And then departments will just ignore findings and recommendations. Also, without a willingness to call out bad acts, then internal audit tends toward just moving paper around and not ever improving government.

For an additional data point, here’s a brief article summarizing a report from the Institute of Internal Auditor’s Audit Executive Center. The article indicates that when internal auditors are hired business acumen and critical thinking are valued substantially more than traditional audit and accounting skills. This matches my impression that, yes of course, you need your internal auditor to be good at debits and credits. But more importantly, understanding operations and being able to think through what is an operational snafu that can be redesigned and what is a bad act is critical to a good internal audit function.

Areas of improvement

In my 3+ years on the Audit Committee, here are some of the areas of improvement that I have noticed. Some have improved. Some are a work in progress.

  • Enterprise Risk Management:
    • This is an industry term to describe having a formal process for an organization to identify all areas of risk, and then grade those risks. Once this is done, the result is used to decide where to allocate your internal audit resources.
    • To make up an exaggerated example…if Metro were to have a single, unbacked-up computer that stored all of its information about property assessments and property tax collections, the risk of losing that information would be graded as very high. In theory, that would mean that the processes around collecting and storing that data would be at the top of the list for an internal audit.
    • Many organizations build a ground up ERM assessment annually to inform the internal audit plan for the next year. Metro doesn’t do this. Metro relies on industry publications and studies, and experience/anecdotal evidence, to build a risk assessment. Metro would need to invest in an ERM software package to improve this.
  • Follow-up on findings:
    • There should be long-term follow-up on any findings from an internal report. When I joined the Audit Committee in 2015, that wasn’t happening.
    • So prior to 2015, an audit report could have a finding, the department could promise to fix the issue, and if the department then ignored the issue, there was never any follow-up or further reporting.
    • At the request of the Audit Committee, we now get reports twice a year (I think it is twice??) on audit items that are unresolved or where the department has pushed back an implementation date. This provides dramatically more oversight.
  • Rejected findings:
    • From previous experience, I expect that departments will accept the internal auditor’s recommendations and promise an implementation date for the fix. When I joined the Audit Committee in 2015, there were way too many recommendations that were being rejected by the department or where no implementation date was promised.
    • To me, that meant that departments probably didn’t have respect for that “business acumen” component of the internal audit function. Rejected findings likely meant that the department was basically saying that internal audit didn’t know what it was talking about.
    • At the request of the Audit Committee, all findings now have an implementation date for the fix. That’s good.
    • Also, departments are rejecting audit findings less often now. To accomplish this, in late 2015 or early 2016, the Audit Committee started asking the Auditor and the department heads to talk more and work out their differences, if possible. As word got around Metro that rejected findings were going to get more attention from the Audit Committee, more of these differences got ironed out.
  • Reports not timely online: Over the last several years, the Audit Committee has leaned on the Auditor to more promptly and more completely get all reports online. To be perfectly honest, my experience has been that mundane reports get posted quickly and controversial ones do not. As recently as last month, a series of reports were issued within days of each other. The most controversial one was the only one to not be posted when I checked. I had to ask about it before it was posted. This is better than it used to be, but not where I’d like it.

What does it all mean?

This Audit Committee work is drudgery. But it is critically important. My work to push for a better enterprise risk management assessment, to force more communication and problem-solving, to require follow-up reporting on unresolved findings, and to get all reports online quickly is the highest value, lowest attention work I’ve done during this term. You should know that David Briley (when he was on the committee as Vice Mayor) and John Cooper (who is the other CM on the committee) have been strong, reliable allies in this work.

This post is to provide background context for my next post about the current ongoing investigations. What I would like you to takeaway is that, in my opinion, there is some evidence that the Metro departments don’t always have a great opinion about the practical business acumen of the internal audit function. There is also some evidence that the audit function has typically shied away from controversy. I think these observations are important context for understanding the current investigations.

Council Feb 5 Agenda

The Council has a full agenda on February 5. It includes several items that are guarantied to make someone mad. Here’s what I am looking at (in the order they appear on the agenda):

Public Hearing

Murphy Road developmentBL -1357 and -58: This is the proposed development on Murphy Road near West End. I believe the developers have met with the neighbors and that discussions are ongoing. I understand that CM Kindall will defer the public hearing again.

Resolutions

NES round-up, RS -1508: NES has a program where customers may opt-in to rounding their monthly bill up to the nearest dollar and allowing NES to use the extra cents to fund its low-income weatherization program, Home Energy Uplift. This non-binding resolution would ask NES’s board to consider transitioning to an opt-out program instead. If NES switched to an opt-out program, all bills would be rounded up to the nearest dollar unless the customer opted-out. This is consistent with other large cities in Tennessee. Supporters argue that this is a relatively harmless way to fund an important program. Detractors feel like it a bit like taxing people without them realizing it. Since the program would come with the ability to opt-out and, by definition, it involved less than $12 per year, I’ll vote in favor of this.

Surplussing property to new community land trust, RS-1570: This resolution would send surplus Metro property to our new community land trust (CLT) for future use as affordable housing. This is a tremendous step forward — and a lot better than selling off Metro’s valuable property to make ends meet temporarily. But this is the first surplussing for the CLT and I’ll have some questions at our committee meetings. I’ll want to make sure I understand the process, how long any units built will be affordable, and how these properties interact with our short-term rental laws. Depending on the information we get in committee meetings, I may vote in favor or to defer one meeting to make sure everyone understands this new process of getting properties into the CLT.

Asking Jill Speering for an apology, RS -1597: This one is guarantied to make a lot of people mad. You can read the Tennessean’s coverage of the back story here. The problem, from my perspective, is that there are some people who have been raising legitimate questions about MNPS and Dr. Joseph’s leadership, and then there are others who tend to not talk about the merits and instead talk about Dr. Joseph being “scary” or “intimidating” or having a “crew” to enforce his will. The second group of critics, to my ear, have helped to inject a race element that’s damaging into the dialogue.

Almost a month ago, I called out the second group as being out of bounds:

Back to the pending resolution…with all respect to those defending Ms. Speering’s text message statement, the intent to the statement is beside the point. In the context where some are raising well thought out concerns backed by evidence, but others are using rhetoric that rings of stereotypes, her statement was wrong. And, as I understand it, Ms. Speering has not publicly expressed any regret for the statement or how it has been interpreted.

Having said all that, I don’t know yet how I’ll vote. I’ll abstain because I’m not that interested in opening the door to a lot of future apology seeking, or I’ll vote in favor because my personal opinion is that some public expression of regret would be appropriate.

Censure the former mayor? RS -1598: This is another one that will make some people mad whichever way it goes. Opponents of this resolution say the Council is beating a dead horse and suggest that the former mayor has suffered enough for what she did. Let me try to get the debate framed by facts.

First, the Metro Board of Ethical Conduct received a complaint while she was still Mayor. In December 2018, that complaint was resolved by the Ethics Board and it recommended that the Council censure her. Under Metro’s laws, once the Ethics Board makes a recommendation, the Chair of the Council Rules Committee “shall” file a resolution for the Council to consider the recommendation. Hence, we have the current resolution.

Now, there are some (perhaps including Metro Legal) who feel that the Ethics Board lost jurisdiction once she resigned, and that the complaint should’ve been dropped at that time. Remember, Metro Legal had a conflict of interest and the Ethics Board used outside legal counsel. That outside legal counsel recommended that the Ethics Board continued to have jurisdiction to make a decision after she resigned. What should we make of the fact that Metro Legal probably thinks there was no jurisdiction and outside counsel thinks that there was? Well, I’ve read Metro’s ordinances on this and, wearing my lawyer hat, my expert opinion is that the drafting of the ordinance was crap. I think the best reading is that there is continuing jurisdiction to consider a complaint after someone resigns, but it was poorly drafted and could use clarifying one way or another.

The fact is that the Ethics Board did make a recommendation and under Metro law the Council “shall” consider it. We can either vote no (either because you think the Ethics Board should have dropped it after she quit or because you don’t think she should be censured) or vote yes (because you think admitting a felony also warrants a censure). Either way, this ridiculous episode will finally be over. I’ll keep listening to my colleagues. But for now, I plan to vote to adopt this resolution.

2nd Reading

Match affordable housing funding to job credit funding, BL -1472: This bill would require setting aside $1 of affordable housing spending for every $1 of job credit spending. In particular, this is aimed at the upcoming legislation to approve job credits for Alliance Bernstein and Amazon. For several reasons, I’m opposed to this. To start, I have been consistently opposed to what I call silo-izing Metro’s budget. I think that slicing and dicing the budget with a ton of required micro-spending cuts into the city’s ability to be flexible and match the needs of a particular year. Beyond that, this is really just disguised opposition to the job credits, I think. From my perspective, if you don’t like the job credits, just vote ‘no’ on them. But passing this bill would just make the job credits literally twice as expensive to the city AND cut down on flexibility in future years.

I don’t know how I’ll vote on the Alliance Bernstein or Amazon job credits — we’ve not seen that legislation yet. But I don’t think doubling the cost of the job credits is the right direction. I think I’ll vote against this bill.

Surplussing $5.4 million of real estate for schools budget, BL -1476, -1477, -1478, -1479: Folks, this is part of the “belt-tightening” that Mayor Briley told us about last year. Instead of properly funding the government from its tax base, the proposal is to sell off one-time assets to make money to balance the budget for the year. The Council can either vote in favor and participate in unloading valuable assets that will never be recovered, or we can vote against and help put a bigger hole in the MNPS budget. Both options are bad.

Among the many reasons why this is a bad way to run a city are: (1) all potential buyers know Metro is in a hurry to sell (which tends to drive price down); (2) at least one of the parcels would benefit from  more dense zoning, but it’s not clear whether Metro has time to do that (which may tend to drive price down); (3) nobody is making more land — once these are sold, they are gone forever; and (4) Metro is losing an opportunity to discuss whether affordable housing would be appropriate on these parcels.

Honestly, I don’t know yet whether I’ll vote ‘no’ to protest this method of balancing the budget or vote ‘yes’ to make sure MNPS’s minimal budget this year gets funded.

3rd Reading

Nashville Yards participation agreement, BL -1442 (as amended): This bill would approve Metro paying for approximately $15 million of the proposed $80+ million in infrastructure improvements related to the former Lifeway campus. This bill has gotten some push back because it is downtown and because Amazon will move there in a few years.

My perspective starts with “This isn’t tax increment financing.” Instead of giving away all new property tax revenue for up to 30 years, Metro will make the upfront investment and keep all of the property tax revenue going forward. There should be more agreements like this where Metro and developer share in the infrastructure costs, especially downtown. These agreements allow Metro to get long-sought after infrastructure improvements without Metro having to pay the full cost.

Also, keep in mind that these agreements are not limited to downtown. For example, in Antioch where I-24 and Hickory Hollow Parkway meet, Metro has agreed to pay half ($12 million of $24 million) to improve the interstate exchange. Like with Nashville Yards, that interstate exchange participation agreement was a once-in-a-generation opportunity to dramatically improve the infrastructure in the area for everyone. I’ll vote in favor of this cost-sharing participation agreement.