Wasted opportunities: Find and investigate waste now

When we’re investigating or auditing, the “waste” component of “waste, fraud and abuse” can take a back seat to its compatriots. Fraud is flashy and gets all the headlines. Abuse is sinister and ugly. Drab waste, it feels, is just what’s left over. But should that always be the case?

In 2004, the U.S. General Accounting Office (GAO) discovered that the Department of Defense (DOD) wasted more than $100 million on unused airline tickets. That’s clearly a number worth your attention. This is a case of waste because the 270,000 unused commercial flight tickets were fully refundable. DOD employees bought flights, which they couldn’t use for legitimate reasons. But then they just didn’t request the eligible refunds. (See DOD Travel Cards, United States General Accounting Office, GAO 04-398, March 2004.)

On a smaller scale, the California Department of Fish and Wildlife wasted more than $500,000 on a customized research boat that couldn’t perform the research surveys for which the department purchased it. State auditors found that the employee assigned to write the technical specifications lacked the expertise to design the custom boat.

The auditors said the department’s management approved final payment to the vendor, including amounts for services and equipment that the department didn’t receive. After the department purchased the custom boat, it sat mostly unused for two years because of several problems, including a fuel tank that caused the boat to lean to one side and hull modifications that made it difficult to steer the boat straight. (See Investigation of Improper Activities by State Agencies and Employees, Auditor of the State of California, Case I2017-1372, April 2020.)

Compelling need to cut waste

Waste, of course, might not always be as interesting or infuriating as these examples, but it’s just as important to find and eliminate as fraud and abuse.

Waste directly impacts the use of limited resources in the public and private sectors. This is especially true at the City of Austin (Texas) government where we work because recent state legislation placed a cap on how much Texas cities can increase their property tax rates, which limits a source of tax revenue the city relies on to generate funding for public programs and city services. (See Gov. Greg Abbott signs bill designed to limit property tax growth, by Riane Roldan and Shannon Najmabadi, The Texas Tribune, June 12, 2019.)

The new limit, plus other caps on revenue collection, is projected to create a deficit of more than $58 million between the city’s revenues and expenses in the next three years. (See Under tax cap, Austin projects $58 million funding gap by 2024, by Elizabeth Findell, The Austin American-Statesman, May 28, 2019.) Faced with that kind of shortfall, the city’s auditors and investigators have a clear reminder why testing for and identifying waste can be so valuable. Even cases with a small dollar value can add up to help close funding gaps.

COVID-19 pandemic and shelter-in-place measures have negatively impacted tax revenues at all levels of government and general revenues in the private sector.

Municipalities are losing out on parking fees, as well as alcohol, sales, gas and hotel taxes because people are staying home. Baltimore projects lost revenue of $130 million for fiscal year 2021, which will end June 30, 2021. San Diego lost $70 million in hotel tax revenue in fiscal year 2020 and projects to lose another $150 million in hotel taxes in 2021. (See ‘Ugly’: The Baltimore budget director’s word for the city’s financial outlook amid the coronavirus pandemic, by Emily Opilo, Baltimore Sun, Feb. 9, 2021, and San Diego estimates $300M tax revenue loss during COVID-19 pandemic, by David Garrick, The San Diego Union-Tribune, Sept. 16, 2020.)

In 2004, the U.S. General Accounting Office discovered that the Department of Defense wasted more than $100 million on unused airline tickets.

Defining waste

Auditing and investigation departments often lack direction on how to define waste. Austin citizens can define waste as city spending they disagree with. But without specific professional criteria the concept of waste is subjective. Looking to other sources for guidance is helpful.

The GAO recently included a detailed description of waste in the updated Generally Acceptable Government Auditing Standards (the yellow book). Given the subjective nature of waste, the guidance doesn’t require auditors to perform specific tests to detect waste, but it does provide guidance on how auditors can report waste to the board or stakeholders “if they become aware of them.”

The GAO defines waste as “the act of using or expending resources carelessly, extravagantly, or to no purpose. Importantly, waste can include activities that do not include abuse and does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight.”

The standards also provide some examples to guide auditors and investigators: “making travel choices that are contrary to existing travel policies or are unnecessarily extravagant or expensive,” which seems applicable to our DOD example above, and “making procurement or vendor selections that are contrary to existing policies or are unnecessarily extravagant or expensive,” which appears to be fitting guidance for the unfit boat purchase in California. (See Government Auditing Standards: 2018 Revision, GAO-18-568G, chapter 6, section 21 & 22, U.S. Government Accountability Office, 2018.)

At the City of Austin, the definition of waste is incorporated into our city code, alongside the definition of fraud and abuse: “the grossly inefficient or uneconomical use of a City asset or resource” or “the unnecessary incurring of costs to the City as a result of a grossly inefficient practice, system, or control.” (See Austin City Code, §2-3-5 (A)(3), “Powers and Duties,” Municode.)

What these definitions have in common is the need to identify unnecessary costs, a breakdown in controls and a disregard for policies and procedures — or some combination of these factors. They also espouse the importance of avoiding extravagant purchases or purchases without clear purpose.

Investigating waste

You might have adopted a great definition of waste at your office. But the challenge is to apply this definition to the circumstances within your organization. When dealing with waste at an auditing level, the challenge is separating what’s wasteful from operational choices when you’re conducting business. Let’s walk through some cases where our office identified waste.

Unnecessary costs

Our office received a hotline call that the City of Austin’s Communication and Technology Management Department (CTM) was paying rent for a new data center facility that it hadn’t moved into yet. At first blush, this appeared to be an operational decision from management to halt a move to address security concerns. However, our investigators found that the city had been paying rent on the unused data center facility for eight months, which cost the city $95,000.

CTM had postponed the initial move because its security team was concerned the department was moving the city’s data into an unsecure space. However, the city could’ve avoided paying eight months of rent for an unused facility because the CTM security team had expressed its concerns several months before the initial move date — enough time to have remedied the situation.

Even more troubling was that some CTM employees and the security team had brought up these concerns about the facility almost a year before the signing of the contract with the facility vendor.

CTM employees had advised the department to take steps to either protect the city’s data or ensure the facility met certain security requirements before signing the contract. Management either ignored or didn’t properly address these concerns. Ultimately, the CTM security team had to step in again at the last hour to urge management to call off the move.

Could the city have avoided this waste? Definitely. If the department had followed up fully with the employees’ concerns and taken early steps to protect the data in the months leading up to the move, they would’ve been able to move into the facility on time and not incur waste.

Our evidence to support this conclusion included interviews with key stakeholders in the project — from the team responsible for moving the data to the department director. Because of internal conflicts among divisions and within teams, we made sure that we had records, emails and documents to support our conclusion. We found that establishing a timeline of events allowed us to pinpoint the moment CTM management decided to begin paying rent for a facility that it wasn’t going to use and the period in which they had time to avoid waste.

The GAO defines waste as “the act of using or expending resources carelessly, extravagantly, or to no purpose. Importantly, waste can include activities that do not include abuse and does not necessarily involve a violation of law.

Ineffective controls

The City of Austin tasks health inspectors with reviewing the health and cleanliness standards of restaurants to ensure they meet minimum standards. In 2017, our office received an allegation that health inspectors weren’t performing their inspections, and their managers weren’t holding them accountable for their poor performances.

Initially, we had to determine if this allegation concerned behavior that could be best classified as misuse of city resources, abuse of position or waste. Ultimately, we decided to keep all these possibilities in mind as we investigated.

We learned that Austin Public Health (APH) had devised a system in which it expected its managers to only review less than 2% of health inspections, and inspectors could decide those cases they’d handle from the master list of cases that needed to be completed. This procedure produced a system in which management didn’t know where and when their inspectors would be working over the course of a day.

At the time, several Austin City departments used GPS systems to track the location of their vehicles and the performances of their staffs, but APH hadn’t comprehensively adopted this technology. So, the inspectors’ reports were the only means of identifying if they’d performed their core function. Our surveillance identified significant discrepancies with the times the inspectors reported. For example, we discovered that inspectors spent some of those times grocery shopping or visiting a gym.

A lack of some controls fostered these issues, but we learned that managers weren’t using the tools they possessed to identify and correct problems. Notably, inspection records, which the managers had access to, showed periods of more than five hours in which inspectors hadn’t conducted inspections. However, the managers hadn’t investigated these incidents.

After we collected the evidence, we finally determined that the case satisfied the appropriate criteria of waste based on ineffective controls. A key consideration for a waste violation included the systemic nature of the problem.

We couldn’t fault any one manager when the system provided so few controls to monitor performances. However, the managers weren’t completely faultless because they didn’t use the few available control tools.

And we couldn’t fault a single individual because everyone was following the same practices. Waste, especially waste resulting from ineffective controls, is often a system- or department-wide issue that spans multiple levels rather than an individual issue. Also, our evidence showed the inspectors were properly completing the inspections. So, the problem wasn’t the quality of the work but the efficiency of the work. In other words, the time-to-inspection ratio was inappropriately high.

Not following policies and procedures

Policies and procedures, of course, are crucial in any organization to provide best practices for staff and help it comply with laws and regulations. But an organization that ignores policies and procedures obviously creates unneeded risk that can lead to waste.

We investigated a complaint that a recently promoted utility employee was mistakenly receiving overtime payments even though he wasn’t eligible for overtime in his new position. We discovered via interviews that two departmental supervisors had missed the promotion because they hadn’t fully reviewed the paperwork, and a human resources employee mistakenly approved the employee’s overtime for several months.

Also, another human resources employee admitted that he hadn’t been regularly reviewing monthly error reports from the payroll system, as he should have, which would’ve pinpointed the error. We discovered additional payroll errors on the monthly report that human resources said it planned to look into after our investigation. Fertile ground for a future audit, perhaps?

Waste is a totally different animal

Once you have a clear and comprehensive definition of waste in your organization, it’s important to understand how a waste investigation differs from abuse and fraud investigations. You might not have a subject of the investigation in the traditional sense. Rather, several people, such as in the improper overtime and data-center cases, might not have performed their jobs properly.

Also, rather than looking for evidence of a subject’s intent, you might have to focus on evidence that shows knowledge of risks or costs, or the knowledge an actor should’ve had about risks or costs. This was a major focus in our data-center investigation where we had to demonstrate knowledge of security risks.

You often will investigate waste cases to discover the rules that organizations broke. But in other waste cases you might examine whether the applicable rules and policies allowed the waste to occur even though organizations followed them as in our health-inspector investigation.

Look for control tools that departments didn’t use or procedural steps that they skipped. In the health inspector case, we found management didn’t use GPS tracking or didn’t use the inspections’ times recorded on the reports. Similarly, in the overtime case, employees ignored the error-report tool and procedural steps that would’ve identified that other employees had ignored the overpayment.

Finally, look for witnesses who weren’t involved with the circumstances that caused the waste. They can provide unbiased testimony on what happened versus what should’ve happened. Similarly, identify subject matter experts in your organization who should’ve been involved in major decisions but weren’t. These interviews allow you to identify a breakdown in controls or checks and balances that led to waste.

All these considerations have helped us with our successful waste investigations and should help frame your investigation planning should employees and others allege waste in your organization.

Temitope Eletu-Odibo, CFE, is a supervising senior investigator with the City of Austin, Texas. Contact her at temitope.eletu-odibo@austintexas.gov.

Brian Molloy, J.D., CFE, is chief of investigations with the City of Austin, Texas. Contact him at brian.molloy@austintexas.gov.