DENVER – Denver Auditor Timothy M. O’Brien, CPA, and the Denver Auditor’s Office is leading the local government auditing industry by using technology to sort through thousands of transactions and focus work on the highest risks in the city.
Members of the Audit Analytics Team, part of the office’s Audit Services Division, shared some of their work at the January Audit Committee, including an explanation of how they are able to more effectively track city spending and analyze pay equity through data analysis techniques.
“We are one of the first local government auditing offices to adopt this type of work,” Auditor O’Brien said. “Using data analytics, automation, and continuous auditing, we can assess every single transaction instead of using random samples. This saves us time and helps us focus our traditional audit work on higher-risk areas.”
Continuous auditing is a method to identify and analyze risks through automated and scheduled analysis of the city’s financial and process data. The Auditor’s Office uses this method internally to help inform audits and make our work more efficient and effective.
“It is important for the people of Denver to understand how we do this, so they can feel assured that we are doing the most we can to keep an eye on their taxpayer dollars,” Auditor O’Brien said. “I expect every agency in the city to operate transparently, and we are no exception.”
In 2019, our Audit Analytics Team analyzed nearly 1 million data points, including contracts, sales tax returns, short-term rental licenses, purchase orders, and salary observations.
In comparison, traditional auditing techniques might analyze a sample of a certain percentage of the entries in a data set meant to represent the whole. While these sampling methods are still valid as a representative, there is a possibility that a high-risk transaction might not be pulled into the sample and might not be included in audit work. Through automation, we can save time and increase the likelihood that we are able to identify only the highest risks, which then better inform our audits.
A risk could be an area of weakness where the city could make an error or lose money, or it could be transactions that look out of place or indicative of bad actors.
As an example, we identified a risk involving large city contracts. We found it was possible for an agency to split a large contract into pieces to avoid the City Council’s oversight. We used data analysis to identify contracts that were just short of the limit that would have sent them to City Council for review and approval. Our audit team was then able to take that information and conduct an audit to see if there was a legitimate reason for a split contract.
Another example of how we used audit analytics and continuous auditing was our automated assessment of all short-term rental licenses. We analyzed about 3,000 licenses. In 2017, we completed a short-term rental audit that found data was entered correctly for only 29% of short-term rental licenses. Since then, our continuous auditing analysis shows, as part of our follow-up report from 2018, the compliance rate is now up to 99%.
New areas we created analyses for in 2019 focused on purchase orders, purchase cards, travel cards, and city employees’ salary and merit increases. These analyses are ongoing internally and will help us focus our future audits.
We assessed three years of salary data and two years of merit increase data. This included about 57,800 salary observations and 12,500 merit increases. Using this data, we are considering whether salary data shows like pay for like work with respect to gender and/or ethnicity. We are also using the data to assess whether merit increase data shows indicators of bias related to gender and/or ethnicity.
Meanwhile, another new data-driven analysis focuses on pass-through vendors, meaning online vendors where any individual can make a “store.” We want to analyze whether city employees could be making purchases from themselves or a closely related person, using taxpayers’ dollars.
We are also assessing risks related to top purchase card spenders, duplicate transactions, and purchased items sent to addresses not associated with the city.
“I am proud of the cutting-edge approach my team is taking,” Auditor O’Brien said. “The Audit Analytics Team provides training and data-related support to our whole office throughout the year. They also teach other cities’ auditors how to do what we do by speaking at professional conferences and forums.”
The Audit Analytics Team includes Audit Director Katja Freeman; Audit Analytics Supervisor Samuel Gallaher, PhD; Lead Data Analytics Auditor Robert Persichitte, CFE, CPA; Senior Data Analytics Auditor William Morales, MBA; and Senior Auditor Chris Wilson, MPA.