Capital improvement programs (CIPs) are often the largest portion of an organization’s budget. With program costs ranging from a few million to several billion dollars, stakeholders want to know where and how funds are being spent. High-profile, high-dollar projects—such as infrastructure upgrades, new schools, and hospitals—likely receive extra scrutiny from the organization, the media, and the public.
Common program pitfalls might include cost overruns resulting from ineffective procurement practices, schedule delays that impact operations, or penalties for noncompliance with state or federal regulations. Expertise in construction programs and the related controls aren’t typically core competencies for educational or governmental organizations and the individual departments within them and organizations that seek to keep programs on track and on budget should commit to a construction performance audit. The key is to select qualified performance auditors with CIP proficiency to identify program risks.
CIP Performance Audit
CIP performance audits provide objective analysis to assist stakeholders with information to improve performance and operations, reduce costs, facilitate decision making, and contribute to public accountability. Audit objectives should be clear and concise and address various performance aspects of the program, including but not limited to:
- Contractor charges
- Schedule, scope, and quality management
- Project funding and plan alignment
- Project controls, including contract administration and procurement
- Compliance with regulatory requirements
- Budgetary management and financial reporting
- Program staffing gaps and redundancies
- Master plan development and scope prioritization
- Change-order controls
- Project close-out
- Communication among stakeholders
For clarification, performance audits don’t just apply to federal projects. Many state and local governments also require them, as do some private organizations when specified by contract, agreement, or law. Take California’s Proposition 39, for example. The “Smaller Classes, Safer Schools and Financial Accountability Act” requires that the proceeds from the sale of school facilities bonds are expended only on the specific projects listed in the proposition authorizing the sale of bonds. Both the state constitution and Education Code require an annual independent performance audit to verify bond proceeds are used on listed projects. However, verifying the bond proceeds are used on listed projects may not be enough to prevent common areas of risk.
The Government Accountability Office (GAO) issues the generally accepted government auditing standards (GAGAS)—also known as the Yellow Book—which provides performance auditors with standards and an understanding of how to apply them to complete audit objectives.
Applicable continuing professional education (CPE), measured in required credits, and technical knowledge of specialized subject matter are required for performance auditors. Paragraph 3.76 of GAGAS, Continuing Professional Education, states: “Auditors performing work in accordance with GAGAS, including planning, directing, performing audit procedures, or reporting on an audit conducted in accordance with GAGAS, should maintain their professional competence through continuing professional education.” GAGAS requires 80 hours of CPE every two years. This includes:
- Twenty-four hours directly relating to government auditing, the government environment, or the specific or unique industry in which the audited entity operates
- An additional 56 hours that enhances the auditor’s professional proficiency to perform audits
In addition to CPE, “the staff assigned to conduct an audit in accordance with GAGAS should collectively possess the technical knowledge, skills, and experience necessary to be competent for the type of work being performed before beginning work on that audit,” according to paragraph 3.72 of GAGAS, Technical Knowledge. So, in addition to specialized construction knowledge, performance auditors on CIP audits also need to bring to the audit their expertise in CIP audit methodologies and analysis techniques. With this expertise, auditors can identify risks based on the audit objectives. These may include:
- Procurement practices and noncompliant procurement practices (board policies and procedures and state laws, for example)
- Staffing gaps and redundancies
- Excessive construction charges
- Schedule, scope, or quality management gaps
Reducing Risk with Performance Audits
It’s important to note that not all performance audit reports result in conclusions that improve efficiency and reduce business risk exposures. Some performance audits are designed simply to validate that contract charges are within the total construction budget or that the scope or projects are included somewhere within the approved master plan. This may not be enough. This limited scope may not take advantage of the power of a performance audit. Further, the audit objectives may not be broad enough to provide information to an organization that would allow the organization to reduce its risks.
If an auditor doesn’t have the technical background in construction and CIPs, the following performance audit components may be at risk:
- Objectives. The most appropriate objectives to address the various performance aspects of your capital program may not be selected. Your CIP may be experiencing cost overruns, gaps in funding availability, or schedule delays. Audit objectives may need to be selected that review project processes, procedures for managing scope, prioritization of projects, quality, schedule, budget, or change-control methodologies and reporting.
- Criteria. The most appropriate criteria to evaluate results, controls, efficiency, and compliance may not be utilized. Setting appropriate criteria is a critical step and may include purposes or goals prescribed by law, regulations, or the audited entity’s officials, policies and procedures, and technically developed standards or norms.
- Methodology and scope. The methodology and scope selected may not result in sufficient and appropriate evidence to support meaningful audit conclusions. CIP scope and methodology should be designed to obtain evidence that addresses the program’s objectives and provide reasonable assurance the evidence is satisfactory and appropriate to support the report’s conclusions.
CIPs can be risky, but organizations can recoup investments of time and money by leveraging the knowledge and objective feedback that is provided by qualified, experienced construction and CIP performance auditors.
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Our Construction Audits & Consulting team has provided hundreds of construction and performance audits. Our professionals have direct experience in the construction industry and meet GAGAS requirements. If you’d like more information about a construction cost audit and how it can benefit your project, contact your Moss Adams professional.