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State auditor’s report could harm private CPA firms, Legislative auditor says

Lori Leysen, audit director with legislative auditor’s office, describes her findings from the Special Review of the State Auditor’s County Audits as State Auditor James Nobles listens. Photo by Paul Battaglia

A report released last year by State Auditor Rebecca Otto’s office that looked into private CPA firms’ reviews of county finances broke generally accepted auditing standards, according to the Office of the Legislative Auditor, and critics say it harmed firms trying to compete both in Minnesota and across the country.

A 2015 law allowing every Minnesota county to hire private-sector accounting firms has created an elongated political battle between Otto and the Legislature. In response to that law, Otto’s office released a report last year examining those private-sector county audits, claiming there were major inadequacies in how CPAs reviewed counties. And in response to Otto, last year’s Legislature issued a special directive to have its investigative arm – headed by Legislative Auditor Jim Nobles – dig into Otto’s office.

On Tuesday, the legislative auditor’s office explained its findings to the House State Government Finance Committee, telling lawmakers that Otto’s office didn’t properly back up its previously reported claims and that it didn’t treat private CPAs with due process or “professional courtesy that is normally practiced” in the industry.

Additionally, Nobles and others questioned if a review of private CPAs, like the state auditor’s, has ever been public.

“This is what’s unusual, is this kind of a report,” Nobles said.

Neither Otto nor a representative from her office appeared at Tuesday’s hearing.

Geno Fragnito, the Minnesota Society of CPAs’ legislative relations director, said Otto’s report “seemed to have a predetermined outcome” that “calls into question” the state auditor’s objectivity.

“It is neither objective nor accurate,” Fragnito said.

These reports usually allow responses from the audited party, according to Nobles, audit director Lori Leysen and Fragnito. The 2016 report released the names of private firms, key findings and conclusions, but didn’t allow for those responses.

“They had no idea there was going to be a published report,” said Leysen, who was in charge of this special review.

Concerned with how bond-issuing agencies could interpret the report, Rep. Sarah Anderson (R-Plymouth) asked Nobles if Otto’s findings would affect counties’ ability to borrow, and how it might impact taxes.

“I honestly don’t know,” Nobles said. “It is not good for the counties or the accounting firms to have this audit out there.”

The legislative auditor’s report also noted that two counties were spending much less on private-sector audits compared to what the state auditor was charging. One county spent an average of $36,434 per year with a private firm, while the state auditor charged that same county an average of $81,128 per year. The other county spent $51,480 on a private CPA firm in 2015, while spending $156,973 the following year on the state auditor.

In response to the Legislature expanding counties’ abilities to hire outside CPA firms, Otto sued Becker, Ramsey and Wright counties, saying the 2015 law violated the constitution’s separation of powers clause. Both district and appeals courts have sided with the Legislature, and the state Supreme Court is expected to weigh in by the summer.

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