A North Carolina watchdog agency recently issued a scathing report on the internal audit program at the state’s Department of Transportation (NCDOT). During an evaluation, inspectors found that the department “has not maintained a robust and viable internal audit effort,” leading to budget and cash flow problems at the department.
NCDOT has the second-largest internal audit division among North Carolina state agencies, but “experienced significant difficulties with completing audits and producing audit reports,” according to an evaluation conducted by North Carolina’s Program Evaluation Division at the request of a legislative committee.
The Office of the Inspector General of NCDOT had not conducted a performance audit since 2016, which could have found and prevented severe issues with budget and cash control, where the department overspent $742 million in the 2018-2019 fiscal year, the report concludes. In addition, internal audit work products were not examined for compliance, which could have identified shortcomings in the auditing process earlier.
Beyond not conducting performance audits, the internal audit function did not conduct any financial, follow-up, information systems, or integrated audits during the fiscal year 2018-2019. Instead, 71 percent of its work products were contractor overhead or cost reviews that usually are prepared by a controller’s office.
N.C.’s Longtime Internal Audit Problems
In 2006, a State Auditor report found that internal audit was deficient in almost every North Carolina state agency, leading to the 2007 Internal Audit Act that requires large divisions to maintain internal audit units and sets a professional standard for audits under guidance of a Council of Internal Auditing. The evaluation found the internal audit unit at NCDOT did not meet the standards required by state’s Internal Audit Act.
Evaluators place the blame on the Council of Internal Auditing. During a meeting of state legislators last week, evaluator John Horne said that “the council has been viable and active but has not probed or challenged the effectiveness of internal auditing.”
Statewide Internal Audit Problems
It appears that the problems in internal audit in North Carolina are not isolated to the Department of Transportation. Indeed, the evaluation identified problems in internal audit across the state.
Among the statewide conclusions of the Program Evaluation Division are:
- North Carolina state government and its institutions lack sufficient internal audit policies.
- Internal audit organizations are not obtaining quality assurance reviews by outside parties.
- Some internal audit sections did not report to the highest management level within the organization.
- Some internal audit organizations did not execute an annual audit plan, while others did not perform risk assessments to develop an audit plan.
Two weeks ago, North Carolina State Treasurer Dale Folwell called for the replacement of two top officials at NCDOT, Chief Operating Officer Bobby Lewis and CFO Evan Rodewald, in the wake of a critical state audit of the agency. (Lewis stepped down from the agency at the end of July.) Recent audits of the department found massive cost overruns and questionable raises at the department.
“The continued mismanagement of this agency is a potential threat to North Carolina’s coveted ‘AAA’ bond rating. For over two years, the NCDOT has been writing checks it couldn’t cash, harming taxpayers, road users and vendors,” said Folwell in a statement. “Getting it right and keeping it right are requirements for issuing more debt on behalf of the NCDOT.”
Improving Internal Audit at NCDOT
The evaluation made three recommendations to improving audits at NCDOT. First, the Board of Transportation Audit Committee should review NCDOT’s audit plans and determine why audits are not being conducted. Second, the Council of Internal Auditing should conduct a hearing on DOT internal audit functions and assist the department in improving the effectiveness of the function. Finally, the Council of Internal Auditing should establish and monitor compliance with standards for all state agencies with internal audit functions.
To better improve monitoring, the Council should also establish a minimum level of performance audit effort in compliance with state audit standards, periodically examine auditing reports and annual plans for conformity and report deficiency, and review external quality reviews and monitor corrective action to make sure that standards are enforced.
Mary Morton, inspector general of NCDOT, said that the agency could see improvement but did not have the resources to provide effective audits. State auditor Beth Wood also shared the sentiment, saying that agency heads struggle to place qualified personnel in internal audit staff positions and that the council could do more to ensure compliance.
The review of North Carolina’s internal auditing is still ongoing, as no legislation can be passed until the General Assembly reconvenes in January. 
Update: The Joint Legislative Program Oversight Committee proposed a draft bill that would have the State Board of Transportation Audit Committee add completed and pending audit reports, as well as expected completion dates, on a monthly basis in the audit plan. The bill also includes the Council of Internal Auditing establishing audit standards across state agencies, as well as properly monitoring compliance. The Council of Internal Auditing will also help the NCDOT improve the audit function’s effectiveness.
Stephanie Liu is assistant editor of Internal Audit 360°