Governmental Contract Auditing: Best Practices from New York City's Metropolitan Transportation Authority
Aldhizer, George R., III, Cashell, James D., The Journal of Government Financial Management
Auditing construction projects that are externally contracted is an effective way for internal auditors to provide significant and tangible value to their employer. This especially applies to internal auditors who work for cities, transit authorities, educational institutions or other governmental entities that frequently engage outside contractors for large construction projects. Third-party contracts for building roads, schools and mass transit systems involve complex agreements and large dollar amounts that extend over a prolonged period of time. Effectively monitoring the performance of outside contractors on these projects can produce significant savings by ensuring that all services due have been received, that overcharges have been minimized,1 and, where applicable, that the organization has met all government-mandated funding requirements. If an organization is not in compliance with these funding requirements, it could lose millions or even billions of dollars in annual federal and state funding for capital projects.
A recent study of best practices in auditing externally contracted construction projects (called CC audits) included internal auditors from nine different governmental entities representing schools, municipalities and transit authorities. All nine of the governmental entities reportedly engaged in multiple major construction projects each year. Despite the risks associated with such investments, however, only two of the internal auditors reported doing any significant type of CC audit work, one reported some minor involvement and the remaining six indicated that they had no involvement in monitoring or auditing their organization's CC projects.2 Furthermore, none of the six internal auditors even knew whether anyone in the organization was responsible for overseeing these contracts. Given the costs and risks of such construction projects, and the potential benefits associated with auditing them, these results were surprising.
Internal auditors at New York City's Metropolitan Transportation Authority (MTA) have developed a model CC audit practice that employs several best practices. Other internal auditors, in either governmental or nonqovernmental organizations, could benefit by incorporating some or all of the MTA's CC audit approach. The remainder of this article describes the MTA's CC audit approach and relates some of the auditors' experiences with it.
Background of the MTA and Its Internal Audit (IA) Department
The MTA is responsible for the efficient and effective operation of all New York City buses, commuter rails, bridges and tunnels, which carried more than 2.3 billion passengers in 2001. This represents about one-third of all mass transit users in the United States. The MTA has 62,800 employees and a $7.3 billion annual operating budget. It employs 100 internal auditors, of which 25 are totally devoted to contract auditing. These auditors obtain specialized education through seminars and on-the-job training with experienced CC auditors.
The MTA devotes a large percentage of its internal audit (IA) resources to CC audits. This is because it spends $2 billion annually on capital expenditures that are funded in large part by the federal and New York state governments. If the MTA is found to be out of compliance with federal and state funding requirements, it could lose these resources. The CC audits also are used to ensure that the MTA gets what it has paid for and to improve the procurement process and contract administration in the future.
The MTA's Contracted Construction (CC) Audit Approach
The approach used by the MTA's internal auditors for CC auditing begins with the selection of which CC projects to audit. Once a contract has been selected for audit attention, it is subjected to a three-phase audit: a pre-award phase, a performance phase, and a completion and closeout phase.
One of the key best practices within this approach is a focus on prevention or, at least, early detection of problems. …