A recent change in state law gave Capital Metro a new board with new members and a new governance structure. In the past, the board consisted of appointed members with little public visibility. Now the Capital Metro board consists mainly of local elected officials. Many consider this a highly appropriate step, given that Capital Metro has the power to levy taxes. The presence of these elected officials also helps to guarantee that Capital Metro's future plans and projects are coordinated with those of the many local governments in Capital Metro's service area. Finally, the new board structure ensures far greater accountability for board member decisions and the authority's daily activities. Because the new board is more directly accountable to the voters, its members will in turn be compelled to hold Capital Metro's managers and staff much more accountable for their individual actions than in the past.
Ethics and public accountability
Ethical conduct concerning public funds involves more than simple compliance with the "letter" of the law. Capital Metro was created by state law and is funded mostly through local tax dollars, yet in the past it has behaved more like a freewheeling sole proprietorship. Capital Metro was viewed early on as a "cash cow," and this seems to have encouraged both vendors and the authority's own staff to take a lax approach to purchasing and contracting. Capital Metro's written ethics standards and its actual practices have failed to provide taxpayer money with an appropriate level of care.
The new board provides far greater incentives for clear ethical standards throughout the authority. The board has recently updated and improved its ethics policies, but further measures are needed.
Checks and balances
The hiring of a general manager for any major transit authority can be a long and often expensive process. By the time board members have weathered this process and hired a manager, they may feel an understandable desire to move quickly into a policy role and trust the general manager to guide the organization's day-to-day activities. Board members of any organization must walk a fine line between "micro-managing" and second-guessing their managers, and removing themselves too far from the operations to hold managers responsible for their decisions and performance.
Internal auditing, conducted by a full-time staff responsible for fiscal and performance audits of the organization for the benefit of the board and senior management, is widely accepted as an essential function in government and corporate organizations. One of the board's specific charges to TPR was to evaluate the idea of restoring Capital Metro's defunct Internal Audit Department, to allow the board to keep tabs on the authority's performance without micromanaging its operations.
In this chapter, TPR recommends that the revised board structure be retained for at least three more years, to lead the beleaguered authority in restoring public trust. Another recommendation would give Capital Metro its first useful ethics program, guided by a trained ethics officer. TPR also recommends that the internal audit function be reestablished without delay and that it be given the authority and resources needed to extend its operations to every aspect of the authority.
TPR's recommendations in this chapter could be accomplished without additional cost to Capital Metro and could save the authority significant sums in the future; these amounts, however, cannot be estimated.
Emphasize accountability within Capital Metro's new board structure.
The 1997 session of the Texas Legislature ended Capital Metro's old board structure. Before this legislative session, the Capital Metro board consisted of seven members, with five appointed by the Austin City Council, one by the Travis County Commissioners Court, and one by a committee of seven suburban mayors and the Williamson County judge. In its place, a new structure was created, including five local elected officials and two appointees of the Austin Transportation Study (ATS), a federally designated transportation planning body for the region whose own board consists of a larger group of elected officials. The goals of this reorganization were to "clean house," ensure accountability by placing elected officials on the board, and improve Capital Metro's operations enough to make it capable of managing a light-rail project should the voters approve it.
In 1997, after State Senator Gonzalo Barrientos cited the "unstable stewardship" of Capital Metro provided by the Austin City Council, the Texas Legislature changed the composition of the board to include elected officials from Austin, Travis County, and Williamson County and two public members.1
Two members of the current board are members of the Austin City Council and one is a member of the Travis County Commissioners Court. A fourth is appointed by a panel consisting of mayors of cities in Travis County other than Austin, and must be a member of one of the city councils presided over by those mayors. A fifth member is appointed by a panel of the mayors of all municipalities located in the authority's service area, but outside of Travis County; the county judges of counties other than Travis County with unincorporated territory inside the authority's service area; and the presiding officer of any municipal utility district, any portion of which is outside Travis County but inside Capital Metro's service area. The member selected by this panel must be a member of a governing body of one of the municipalities, counties, or municipal utility districts represented on the panel. Finally, as noted above, the two public board members are area residents appointed by the ATS.2
As the Legislature was considering this change, Representative Glen Maxey of Austin stated that many members of the Austin-area legislative delegation were unsure if this fix was the right one, but that it was "time to stop the bickering and mismanagement of a major public asset."3 Legislators predicted that the board of elected officials could address Capital Metro's problems aggressively because they would be more accountable, as elected officials, than private-citizen appointees. As of this writing, the board has taken several steps to fulfill those expectations, including adopting an ethics policy and a streamlined budget.
However, because members must vacate their board posts if they leave their elected offices, turnover among board members may increase, making it more difficult for the new board to find its way.4 Indeed, this has already happened in the first nine months of the new board's existence; in May 1998, two members left the board because they also left office. Their replacements joined the board on May 11, 1998. These new members have a steep learning curve. The board only recently completed and approved its fiscal 1998 budget, and is already preparing the fiscal 1999 budget. The new members also just missed a week-long Capital Metro workshop on the future of light rail in the Austin area.
Transit board governance models
Two other Texas transit authorities have elected officials on their boards, but their structures are very different from Capital Metro's; as city transit departments, the El Paso and Laredo authorities are governed entirely by their respective city councils. No other Texas transit authority has a board with elected officials. The other authorities are governed by boards of private citizens appointed by city councils, mayors, county judges and county commissioner courts, as with Capital Metro's old board.5
Among the out-of-state peer transit authorities surveyed by TPR, only one other board includes elected officials with automatic appointments to the board. That authority is Madison Metro Transit, a department of the city government of Madison, Wisconsin. Madison Metro Transit is governed by a Transit and Parking Commission consisting of 11 members, including three city council members, appointed by the mayor and confirmed by the city council. Two other peer out-of-state authorities are departments of the city and county, respectively, in which they are located, and thus are governed by the city council and county commissioners court. The remainder are governed by members who are usually appointed by some combination of mayors and county commissioners.6
Prior transit experience
Very few of Capital Metro's past or current board members have had direct experience in the transit industry.7 This is not unusual; no Texas transit authority requires direct transit experience of its appointees, and only a few of the 49 board members Capital Metro has had over the last 13 years had such experience. However, several of the most effective past members, at least in the opinion of long-time Capital Metro employees, had some prior interest in transportation or transit issues.8
Governing boards of other public entities often require some board members to have a "demonstrated interest"-that is, a degree of expertise or a history of activism or involvement-in the services provided by the entity. For example, two of the seven board members of the Indianapolis Public Transportation Corporation in Indianapolis, Indiana must be bus riders.9 Similarly, Texas state law requires that the State Board of Health include four members with a demonstrated interest in the services provided by the agency, as well as two public members. The board of the Texas Department of Mental Health and Mental Retardation includes nine public members with a demonstrated interest in mental health, mental retardation, developmental disabilities, or the health and human services system. Members of the Texas Historical Commission must, among other requirements, have a demonstrated interest in preservation of the state's historical or archeological heritage.10
Transit board terms
Current Capital Metro board members serve two-year terms and can serve multiple terms if they are reappointed and continue to meet the statutory requirements for membership. Some observers think a two-year term is too short a time to develop the expertise in transit issues necessary to provide the authority with effective leadership.11 Originally, Capital Metro's statute provided for four-year terms, but these terms were changed to two years in the 1991 legislative session following a Texas Attorney General's letter opinion (LO-88-66) that the terms were unconstitutional.12 (Article XVI, Section 30 of the Texas Constitution provides that terms for all offices not fixed by the Texas Constitution cannot exceed two years.)
All Texas transit authority board members serve two-year terms.13 Some Texas authorities, including VIA Metropolitan Transportation Authority in San Antonio, the Metropolitan Transportation Authority of Harris County in Houston, and Dallas Area Rapid Transit in Dallas, are authorized to have staggered two-year terms.14 Among Capital Metro's out-of-state peer transit authorities, board members' term lengths range from two to five years, with most serving three- or four-year terms.15
Need for orientation
When new Capital Metro board members begin their terms, the authority supplies them with a manual containing a brief history of the authority, its authorizing statute, bylaws and resolutions, and other pertinent information. Capital Metro staff members arrange briefings by senior managers on current projects. In addition, the staff tries to arrange periodic retreats and work sessions for its board. Recently, the authority sponsored a five-day workshop with light-rail engineering experts to provide technical and financial information for board members in preparation for decision-making on light rail.16 The staff also notifies board members of various external training opportunities, including a special seminar hosted by the American Public Transit Association every year. Capital Metro has set aside funding in each budget to pay for the travel and expenses of board members attending such events. However, Capital Metro has no regular program of orientation for board members, so the training provided to each varies.17
A. The new Capital Metro board structure is a major improvement that should be retained for at least three more years.
Continuation of the current structure will be essential to restoring public trust and providing stable leadership. Capital Metro desperately needs several years of strong, continuous leadership to help cultivate a history of sound management.
B. State law should be amended to direct the Texas Sunset Advisory Commission to review the composition and length of terms of the Capital Metro board before the January 2001 legislative session.
The effectiveness of the current board structure should be reevaluated in three years to see whether it should be adjusted. Options could include staggering the terms of board members, increasing their terms, adjusting the board's size, and adding requirements for specific expertise (a constitutional amendment maybe required for some of these options). The Sunset Commission, which is authorized to review transit authorities, is scheduled to conduct a full review of Capital Metro in 2003. Nevertheless, a review of the board structure prior to the January 2001 legislative session would be useful to see if any board governance improvements are needed.
C. The board should ask its staff and the Austin Transportation Study to jointly develop an orientation training program and workshop for all new board members.
Capital Metro needs an orientation and training program for new board members. The program could be modeled in part on a recent Capital Metro-ATS joint workshop held for the board. Such orientation and training sessions should be videotaped so that new board members can get prompt training by watching the orientation videos upon appointment. The board also should consider broadcasting these videos on local-access cable television for the general public's viewing.
The training program should gather and condense the volumes of past studies conducted by or on behalf of Capital Metro and present a historical overview of the authority and the types of decisions the board is called upon to make. This training should include summaries of Capital Metro's basic services, its customer base, operations, fiscal matters, community issues, labor relations, federal funding, demographic projections, and potential future plans and projects.
Changes to the composition of the board and the board members' terms would have no fiscal impact. Training sessions should be videotaped using existing resources, with no additional expenditure of taxpayer dollars, and without the expensive use of outside media production firms. Capital Metro could standardize its board member training program with the $34,000 already set aside for that purpose.18
Require Capital Metro to file financial disclosure statements with the Texas Ethics Commission and allow the authority to request ethics advisory opinions from the commission.
The Texas Ethics Commission advises public employees to "act fairly and honestly and avoid creating even the appearance of impropriety."19 Unfortunately, the lack of clear ethical standards, procedures, and practices has been a problem since Capital Metro began in 1985.
In the past 10 months alone, the Federal Bureau of Investigation, Travis County District Attorney's Office, and Federal Transit Administration (FTA) all have focused intense scrutiny on Capital Metro.20 Recently publicized findings and allegations include the following:New code of ethics
The FTA found that Capital Metro had violated federal regulations by contracting with a firm for lobbying services without first informing the FTA.21 The media have publicized numerous allegations of conflict of interest and favoritism in the award of high-dollar contracts. Two companies owned by former board members or their families were listed as subcontractors on bids to oversee the development of light rail, a project initiated after a decision voted on by these former board members.22 Capital Metro awarded a contract to create a purchasing manual, apparently without soliciting bids, to a colleague of the last procurement director.23 The resulting manual was essentially a duplicate of a manual used by Dallas Area Rapid Transit. In December 1997, Capital Metro's chief financial officer demanded a refund for this project from the contractor, but no refund had been received as of June 1998.24
The federal government requires transit authorities that receive federal transportation grants to adopt a code of conduct.25 Citing that requirement, Capital Metro's board recently updated its code to reflect some of the concerns raised by recent events at the authority, including procedures to avoid conflicts of interest. Those procedures prohibit employees and board members from participating in decisions on matters involving a business or real property in which the employee or board member has a substantial interest, if it is reasonably foreseeable that the participation will result in a conflict of interest. It specifically prohibits employees and board members from participating in the award or administration of a contract if they have a conflict of interest regarding that contract. It also prohibits employees and board members from accepting bribes, disclosing confidential information for personal benefit, or using Capital Metro facilities, equipment, or supplies for personal benefit. Capital Metro policy also contains a revolving-door policy to prevent former employees from seeking immediate employment with authority contractors, although it is unclear whether this applies to board members as well.260
Components of successful ethics policies
Even Capital Metro's updated policies, however, do not meet the standards set by other public entities, including Texas state agencies and other transit authorities. First, Capital Metro's ethics policy is not sufficiently comprehensive. For example, it does not specifically prohibit the use of public funds for campaign purposes; provide detailed guidelines for outside employment; or include a strong statement about Capital Metro's commitment to open records. While Capital Metro's new code is modeled on the ethics policies of San Antonio's VIA Metropolitan Transportation Authority, its conflict-of-interest prohibitions are less stringent than VIA's.
TPR surveyed ten peer transit authorities on this point, including those of Albany, New York; Richmond, Virginia; Madison, Wisconsin; Cincinnati, Ohio; San Antonio, Texas; Kansas City, Missouri; Albuquerque, New Mexico; Salt Lake City, Utah; Louisville, Kentucky; and Indianapolis, Indiana. Unlike five of the ten peer transit authorities surveyed by TPR, Capital Metro has not designated an ethics officer to whom employees can bring ethical questions they are reluctant to discuss with their supervisors.27 Other public entities, including some transit authorities, the University of Texas System, and the Texas Rehabilitation Commission, designate a general counsel or other senior-level employee as the ethics advisor.28 The Texas Comptroller's office has an independent ethics advisor.29
According to Michael Hoffman, executive director of the Massachusetts-based Center for Business Ethics and executive director of the Ethics Officer Association, a confidential reporting system for ethics questions is one of the most important components in any ethics program, such as "a hotline through which employees can call the ethics office to get help with ethically difficult situations, or when they feel they need to report a potential problem."30 Texas Instruments employees, for instance, have an ethics hotline they can call for advice; they also can send confidential mail or e-mail to the company's ethics officer.31
Capital Metro's employees currently have no such recourse. In the absence of an independent ethics officer, employees can only approach their supervisors or go outside the established chain of command. One problem is that Capital Metro contracts out for much of its legal work, and until recently has lacked a staff chief legal counsel that could be designated as ethics officer. Capital Metro recently hired a full-time chief legal counsel whose duties have not yet been fully defined.
Discontinued ethics hotline
From May 1995 to May 1997, Capital Metro employees did have an avenue to register ethical concerns through an outside telephone hotline that ensured confidentiality. At the direction of the general manager, who was concerned about the growing costs of worker's compensation claims, Capital Metro's former chief internal auditor contracted with EthicsLine, a service run by the Association of Certified Fraud Examiners. Employees could call a toll-free number to report concerns regarding fraud, harassment, waste, or discrimination, or other ethical concerns. EthicsLine employees took the calls, gathering information about the situation, and then provided a report to Capital Metro's internal auditor.32 The hotline was not designed to offer employees specific advice; still, its cost was modest-$750 per year for up to 1,000 employees. Other costs included $1,916 for the printing of employee pamphlets and hotline posters.33
No written record of the internal auditor's efforts to follow up on these reported abuses exists, although Capital Metro's manager of Risk Management stated that the internal auditor verbally referred two worker's compensation fraud cases to her.34 In addition to worker's compensation fraud, other reported abuses included discrimination and harassment. Capital Metro did not renew its contract with the EthicsLine after May 1997.
Need for ethics training
Capital Metro has no training program to ensure that employees become familiar with the authority's ethics policy. Employees at a TPR focus group held on November 20, 1997 were asked if they had seen the authority's ethics policies, knew where to turn with ethics questions, or had received training on ethics. The employees answered negatively to each question.
After this event, the Human Resources Department circulated copies of Capital Metro's ethics policies to each supervisor and instructed them to insert a copy in the Human Resources Policy and Procedure Manual distributed to every manager.35 However, even Capital Metro's executives admit that their employees are not aware of the manual.36 Supervisors also were instructed to distribute copies of the policies to their employees, but no follow-up was provided to ensure that this was done. Capital Metro once distributed an employee handbook that could have been modified to include the code of conduct; this handbook, however, is no longer distributed. According to Capital Metro, future new-employee orientation sessions will refer employees to the Human Resources manual to read the ethics policy, but the authority has no plans to provide existing employees with other opportunities to learn about the policy.37
Many government agencies, including the Comptroller's office, have developed a variety of ways to heighten employee awareness of their codes of ethics, including written material, oral presentations, and videos.38 At the Capital District Transportation Authority in Albany, New York, for instance, employees receive an annual presentation from the New York State Ethics Commission.39
Financial disclosure requirements
Unlike state agencies and some other regional subdivisions, metropolitan transporation authorities have no specific entity comparable to the Texas Ethics Commission to address their ethical concerns and questions. Furthermore, transit authorities are not subject to some requirements, such as financial disclosure, which are designed to keep public entities accountable.
Chapter 572 of Texas' Government Code requires financial disclosure by top officials of state agencies. Regional entities, including transit authorities, are left unaffected unless specifically included in the state's definition of entities subject to financial disclosure. Currently, that definition includes state agencies, university systems, and river authorities. Capital Metro's general manager and most board members, therefore, are not subject to disclosure requirements. Since 1986, however, board members appointed by the City of Austin have been subject to the city's financial disclosure ordinance.40
In February 1998, the FTA conducted an intensive two-week audit of Capital Metro's contract and procurement practices. According to FTA auditors, Capital Metro receives a flood of unsolicited proposals for vendors' products and services; these represent a significant problem to Capital Metro simply because the authority has no documented procedures for addressing such proposals. The FTA recommended that Capital Metro establish clear, written policies and procedures for handling unsolicited proposals from outside vendors.41 TPR concurs.
Because Capital Metro carries a large cash surplus, the authority no doubt will continue receiving a large volume of unsolicited proposals. This is understandable and to some extent even desirable; some unsolicited proposals may lead to innovative solutions, better customer services, savings, or other benefits. But Capital Metro's ethics policy must ensure that unsolicited proposals to the staff and to board members are handled consistently, in an open, above-board manner. It is essential that discussions and decisions about unsolicited proposals be openly disclosed, with ample opportunity for the solicitation and evaluation of competing proposals.
As this report went to press, Capital Metro informed TPR that the authority has prepared a draft policy addressing unsolicited proposals. This policy has been approved by the general manager and several other senior managers. However, to be fully effective, this proposal should be approved by the board and incorporated into an overall ethics policy for both board members and Capital Metro employees to follow.
A. State law should be amended to require Capital Metro board members, the general manager of Capital Metro, the internal auditor, the chief financial officer, the manager of Contracts and Procurement, the Facilities administrator, and the chief operations officer of StarTran to submit financial disclosure statements to the Texas Ethics Commission and to give Capital Metro standing to request ethics advisory opinions from the commission.
Changing the definition in Chapter 572 of the Government Code to include Capital Metro would require all of its board members and its senior managers to submit annual financial disclosure statements. The change in definition also would permit Capital Metro to request written advisory opinions from the Texas Ethics Commission.42
The top management of any agency funded by public money should submit financial disclosures simply because the public is entitled to know of financial interests or relationships that might present a conflict of interest. This kind of adherence to high standards for top officials also indicates to all employees how seriously the board and management take this issue.
B. The board should formally designate its new position of chief legal counsel as the authority's ethics officer and adopt the suggested job description (Exhibit 4) for state agency ethics officers developed by the Texas Ethics Commission.
The board should adopt this as a formal policy statement by August 15, 1998. According to standard business practices, the ethics officer should be a member of the management team who does not have too many other operational job responsibilities. The chief legal counsel would be the most logical choice. The ethics officer should report directly to the general manager and board.
Job Description for an Agency Ethics Officer
Published by the Texas Ethics Commission
Serve as resource regarding ethics laws affecting agency personnel:Monitor agency policies and procedures:
Maintain knowledge of current laws Monitor the Texas Ethics Commission's rules and advisory opinions Monitor ethics legislation introduced in the Texas LegislatureDevelop ethics training program: Develop and distribute agency ethics policy Assist in revision of personnel policies and procedures Develop new policies as prompted by questions, new regulations or laws Work for integration of the "ethics message" into all areas/programs of
the agencyAssist agency personnel in ethical decision-making:
Develop training materials, class format Offer ethics leadership classes for upper management and executive
Train agency staff Provide new employee orientation Develop materials and methods for reinforcement and follow-up to
classesC. The board should adopt policies and procedures to ensure that employees can obtain confidential advice on ethical issues and air ethical concerns without threat of retribution.
Provide confidential opportunities to hear employees' ethical concerns
Advise employees and management concerning ethics issues and ethics
These policies should be adopted by December 1, 1998. Capital Metro's ethics policy should state, and the management team should emphasize, that employees may take ethical concerns or questions directly to the ethics officer without consulting their supervisors. Capital Metro should provide employees with multiple avenues to report ethical concerns or ask questions with guaranteed confidentiality, including a telephone hotline or a post office box to which employees may write.
D. The board should direct the general manager to establish a mandatory ethics awareness program for all employees and board members.
Ethics awareness programs should be in place by January 15, 1999, five months after the ethics officer is appointed. All Capital Metro and StarTran employees should be required to attend ethics awareness training classes by July 15, 1999. The board should establish a policy requiring all new employees to attend ethics awareness training within six months of employment.
Capital Metro should begin by sending its ethics officer to a formal training program such as those offered by nationally regarded centers such as the Project in Professional Ethics offered by the University of Houston at Clear Lake.
The ethics officer should be required to use the information gained from such training to develop and provide ethics awareness programs for board members and all Capital Metro and StarTran employees. The ethics awareness programs should include a discussion of issues pertinent to a public agency, as well as the elements of ethical decision-making. All management personnel, without exception, should attend an ethics class specifically designed for managers; another course should be established for all employees.
The code of ethics should be presented in a handbook, with a strong introductory statement from the board or general manager stressing the commitment the authority has made to a high standard of ethics. Capital Metro also should provide employees and board members with on-line access to ethics information, as have Texas Instruments and the University of Texas System.
E. As part of Capital Metro's written ethics policy, the board should adopt clear provisions and guidance on how board members and staff should handle and document unsolicited proposals for outside services and goods.
All unsolicited proposals to employees and board members should be forwarded to the Contracts and Procurement Department, which would document and track the proposals. Contracts and Procurement should keep a memorandum on file describing each unsolicited proposal and how the proposal was delivered to Capital Metro. These memoranda would be subject to open records and thereby available to the public and competing vendors upon request. In addition, the department should send a confirmation letter to vendors of unsolicited proposals and provide them with information about Capital Metro's procurement policies and procedures.
The chief counsel could assume ethics officer duties without additional costs.
Since Capital Metro already has e-mail and network capabilities, it could provide ethics information on-line. An ethics hotline that employees could use to communicate with the ethics officer also could be established with existing resources.
Ethics training for the designated ethics officer could be obtained at the University of Houston at Clear Lake or other centers of comparable quality. The cost of such training cannot be precisely estimated as it depends on its type and location. At most, the training would cost about $3,000. No additional costs would be involved, since subsequent training of managers and other employees would be conducted by Capital Metro's ethics officer using existing resources.
Reestablish the Internal Audit Department and require it to report directly to the board.
Capital Metro had an internal audit function from 1985 until the function was eliminated in February 1998, during one of the authority's reorganizations. The new board subsequently discussed the need to reestablish this function in a way that makes it more effective and directly responsible to the board. TPR was asked to consider ways to establish such an internal audit function, given the past history of internal auditing at Capital Metro and the board's immediate and long-term information needs.
Weak support for internal auditing
Throughout Capital Metro's history, the Internal Audit Department reported to the general manager with little direct contact with the board. For the most part, previous general managers have not been supportive of internal auditing. In the beginning, the function had a strong start-but only briefly.
An Internal Audit Department with four auditors was established shortly after the authority began operations in 1985. By 1993, however, the department had been cut back to a single auditor with no formal reporting relationship to the board. During this period, senior managers typically disputed, rather than embraced, Internal Audit's findings and recommendations. In 1993, the single internal auditor was briefly elevated to a dual reporting status, reporting to the general manager for daily affairs and to the board for quarterly Internal Audit update meetings. But after yet another round of management turnover, this dual reporting relationship was ended. Finally, the department was eliminated entirely.
Unresolved audit findings
TPR's review of past Internal Audit reports showed that the function has produced serious findings and recommendations that were rarely implemented or tracked in any systematic way by Capital Metro management. To be blunt, past general managers and board members routinely ignored the findings and recommendations of the chief internal auditor. Many of the Internal Audit reports uncovered serious contractual, fiscal, and ethical problems. These include problems concerning the contract to provide services to the University of Texas' student bus shuttle routes; the outsourcing of Capital Metro's van pool program; and employee abuse of Capital Metro cellular telephones and toll-free phone lines.
About 24 of the 76 findings in KPMG Peat Marwick LLP's July 1997 performance audit repeated findings of prior Internal Audit reports.43 By the same token, however, the Internal Audit Department itself did not always follow up on its own prior findings and recommendations. KPMG's review found that this follow-up was "inconsistent and typically undocumented."44
An internal audit department can be effective only if management takes its reports seriously and attempts to address its findings. An oversight board such as Capital Metro's must hold managers responsible for explaining and correcting findings uncovered by internal auditors. Reinstating internal auditing at Capital Metro without ending the cycle of repeated and unheeded audit findings would be a waste of money.
Need for independence
A fundamental cause of Capital Metro's persistent failure to use internal auditing effectively was its failure to grant the department independent authority. One of the foremost professional standards for both certified public accountants and internal auditors is the requirement for independence.
As a practical matter, internal auditors obviously must have a good daily working relationship with their organization's managers and staff. To the extent possible, internal auditors should serve as "internal consultants" to help find opportunities for improvements and address problems early on before they become major ones.
At the same time, however, the standards of national and international audit organizations all require auditors to be independent of the activities they audit. Auditors are effective only when they have the authority to work objectively and without hindrance in determining the scope of their audits, and can gain access to records and employees without interference. A key part of this independence requires auditors to report to at least one level above that of the area under audit. In the case of Capital Metro, the scope of an internal auditor's work should include all functions under the control of the general manager; therefore, the internal auditor must report directly to the board to ensure independence and objectivity.
Independence also means that an internal audit function should focus only on its role, without involvement in other duties. When managers assign unrelated work to internal auditors, they are interfering with the audit function and reducing its effectiveness. According to professional internal auditing standards, when internal auditors have to audit an area for which they have had some responsibility, their "objectivity is presumed to be impaired."45
At Capital Metro, the Internal Audit Department was responsible not only for auditing Capital Metro, but also for managing a large security force and conducting cost-price analyses; neither activity was even remotely connected with the department's primary function. While the department claimed to have saved Capital Metro about $3 million by performing cost-price analyses on procurements, that function should have been conducted by budget or purchasing analysts.46 In this case, the Internal Audit Department filled a void by reviewing purchases in greater detail than Contracts and Procurement was willing to do or capable of doing. Under such circumstances, Internal Audit's action was laudable. However, it would be difficult for an internal auditor to remain objective in subsequent examinations of the purchasing function after having been personally involved in the process.
Keys to effective internal auditing
The main key to internal audit effectiveness is the support of the board and general manager. An internal audit department, no matter how good the quality of staff, cannot be effective if its work is not respected and acted upon. Internal auditors, in turn, should be expected to play a key role in providing meaningful management information services. This requires the chief internal auditor to have constant and open communications with the board and general manager.
Another key element is a detailed annual audit plan for the board. Audit plans should be discussed thoroughly with the board to make sure that time is not wasted on low-priority areas, and that the board and the internal auditor have a mutual understanding of which audits are to be performed and their expected benefits. Repeated "cookie-cutter" internal audits of the same areas, year after year, only guarantee a low level of interest by the board and managers.
Internal audits should be conducted according to professional standards established by the internationally recognized Institute for Internal Auditors. The chief internal auditor should be held accountable not only for maintaining these standards, but for designing audits to generate the biggest impact and most useful recommendations.
Finally, internal auditing cannot be effective without rigorous follow-up on past audit findings and recommendations. The internal auditor's job is to methodically track all unresolved audit findings and recommendations and regularly provide tracking reports to the board and general manager. This system can be used to target audits on areas with repeated problems.
Also, the board can use the audit tracking reports to evaluate the performance of the general manager and other top managers. Audit tracking would alert the board to a general manager who consistently fails to correct significant problems in the organization.
The new board has a finance committee that meets almost weekly with Capital Metro's senior administrative, operations, and financial managers. During the last nine months, the finance committee has become actively involved in promoting improvements in the authority's finances and operations. Still, the board does not have an officially designated "audit committee" to serve as the point of routine contact with internal and external auditors and federal agency compliance reviewers.
Board audit committees became standard in the late-1970s as a result of the Foreign Corrupt Practices Act, a federal law enacted after the Watergate scandal exposed the need for tighter accountability and financial controls in public corporations. When the savings and loan industry collapsed in the 1980s, a federally appointed Treadway Commission was created to study issues concerning fraudulent financial reporting and ways to make managers and board members more responsible for the adequacy and effectiveness of internal management and financial controls. The Treadway Commission recommended that corporate boards of directors establish audit committees to be "informed, vigilant, and effective overseers of the financial reporting process and the entity's internal controls."47 Professional internal audit standards require that internal audit directors have direct communication with the board, and a board audit committee is an effective vehicle for such communication.
Typically, a board's audit committee would be responsible for these items, with final review and approval by the full board:
Responsibilities to the Internal Audit function:Responsibilities to the board:
Develop a formal internal audit charter of authority, duties, and responsibilities Recommend the appointment or removal of the director of internal auditing Review audit plans and audit budgets Review audit results and management's responses to audit findings and recommendations Follow up on unresolved audit findings and recommendationsInternal auditing in other transit systems Review financial and other management reporting decisions Oversee relations with external auditors Understand and monitor significant management control risks Review compliance with laws, regulations, and ethics48
In a 1995 American Public Transit Association survey of 24 transit agencies, a majority of internal audit departments (62 percent) had dual reporting relationships to top management and the board of directors or a board audit committee. Of the departments reporting to boards or audit committees, 29 percent had only a "dotted-line" relationship to the board or audit committee; in other words, the internal audit function reports primarily to the general manager, with only limited access to the board or its audit committee-rather like the situation at Capital Metro, when it had an Internal Audit Department. This sort of relationship failed Capital Metro repeatedly.
A. The board and general manager should hire an internal auditor. In recent months, the board has been directly involved in selecting a new chief financial officer, a key position considering Capital Metro's long history of fiscal problems. TPR recommends that the board build on this precedent and work with the general manager to select an internal auditor no later than September 1, 1998.
The budget for the internal audit function should be kept separate from other administrative functions of Capital Metro. The internal auditor should focus on auditing and should not be assigned other operational duties such as the management of security officers.
The board should hire only one senior-level internal auditor and should require that person to become familiar with Capital Metro's operations. The internal auditor should be allowed to contract for outside expertise when conducting audits requiring specialized knowledge, such as audits of information systems. After internal auditing has been operating for one year, the board should assess whether more internal auditors are needed. All requests to hire additional internal audit staff should be incorporated and justified in the Internal Audit Department's annual audit plan to the board.
B. The Capital Metro board should establish an audit committee to serve as an oversight body for the internal auditing function as well as all external audits.
An audit committee would ensure that the internal audit function is guided by the board's goals and expectations and that internal audit reports receive special attention. The board either could establish a new committee for these functions or could expand the duties of the finance committee and rename it as the "finance and audit committee."
The committee should develop written policies to provide independent authority to the internal auditor and to provide an open channel of communication between the auditor and the board.
The department must have stronger authority and independence to do its job. Therefore, it must have far more direct contact with the board. Direct reporting to the board would give the department a free hand to select areas for audit, fully disclose the results of its audits, and methodically follow up on managerial responses to its reports.
C. The board should require the internal auditor to compile and track all unresolved audit findings and recommendations and regularly provide these tracking reports to the board and general manager.
This should be one of the internal auditor's first tasks. Copies of these internal audit tracking reports should be furnished to all department directors and senior department managers so that they do not lose sight of work remaining to be done. (As discussed in Chapter 2 of this report, the internal auditor also should compile a list of the findings and recommendations from all previous outside reviews, including financial audits, federal reviews, and special consulting reports.)
Before items are taken off the audit tracking list, the Internal Audit Department should be required to verify that each item has in fact been implemented or otherwise resolved to the board's satisfaction. In particular, the Internal Audit Department should verify whether all savings identified in past audit and consulting reports have been achieved, and if not, seek an explanation.
D. State law should be amended to authorize and require the board to hire an internal auditor.
Just as the board is specifically authorized to hire its general manager, it also should be authorized and legally required to hire an internal auditor. The statutory amendment, modeled in part after Section 201.108 of the Texas Transportation Code, could specify that the board appoint an internal auditor who reports directly to the board. The amendment should state that the internal auditor can be removed only by a majority vote of the board, and require that internal audits be conducted according to professional auditing standards.
Amending Capital Metro's statutes would ensure the continuation of the internal audit function and provide a degree of board oversight over authority operations that seems necessary, given Capital Metro's problematic managerial history.
No fiscal impact should result from these recommendations. Capital Metro already has approved funding for its internal audit function in the fiscal 1998 budget. An independent internal audit function should be expected to make recommendations for savings, cost avoidance, revenue enhancement, and operational improvements. If effectively managed, the internal audit function could save millions of dollars annually, but these savings cannot be estimated.
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