“We’re dealing with billions of dollars here,” she said. “We almost doubled the state’s federal spending in 2021.”
Before the pandemic, Washington spent about $18 billion in federal money each year, according to a recent report. Federal support jumped to an estimated $36.5 billion last year, completely changing the scale of auditing required.
The State Auditor’s Office typically works on the back end of government spending to ensure officials accounted for their costs properly and used the money as allowed. Auditors monitor about 2,300 different agencies and governments statewide, ranging from the city of Seattle to rural cemetery taxing districts, issuing public reports on spending practices and any violations.
“We are the eyes,” Armijo said. “We are looking to make sure that within your community, within your state, that the money is used for the right purposes, and it’s going for the right reasons. Is it getting to the people who need the service?”
With multiple federal recovery bills urgently distributing money directly to states, cities, programs and projects, government officials have had to navigate complex — and sometimes shifting — spending rules. Many small governments are facing their first audit of federal dollars. And there’s still more money on the way.
“Any time you have a massive amount of money going out,” Armijo said, “… you’re going to have an increase in fraud.”
The mounting demands have at times stretched the auditing staff thin and triggered backups on reporting schedules. The State Auditor’s Office has asked the Legislature for an additional $1.4 million to help cover the glut of new work, including an estimated 12,000 extra staff hours for auditing state-level agencies alone.
Without extra support, the auditor’s office would have to cancel or delay its oversight of high-risk transactions at some state agencies right when that examination is needed most. While Armijo said she has not seen an alarming increase in fraud yet, considering the sheer amount of money coming through, she expects it’s in there waiting to be uncovered.
“In my mind, it’s a little concerning that we’re not seeing more fraud being reported to us,” she admitted. “But we’re still anticipating that we’re going to see more.”
An expectation of transparency
Auditor Pat McCarthy said the State Auditor’s Office has had transparency and independence built in since its beginning. McCarthy answers directly to voters as an elected state official, she said, and the office must audit operations across all branches of state government, including the Office of the Governor and the Washington Supreme Court.
“The work that we do really helps government to keep a check on how they’re managing the public’s dollars,” she said, adding, “The expectation by the public is very strong and it’s very high. … It’s important for them to know we’re coming in and looking at things.”
The auditor’s office has about 400 employees with many assigned to regional offices around the state. In its 2021 annual report, the office tallied 1,090 accountability audits, almost 700 financial audits and 355 federal audits completed from July 2020 through June 2021. That work identified more than $400,000 in misappropriated money.
The most recent statewide audit that covered the first months of the pandemic through June 2020 included $7.2 billion in COVID-19 related spending, and auditors issued 54 “findings” for improper payments, insufficient records or unmet requirements.
Auditors also conducted an in-depth investigation into fraudulent applications for state unemployment payments in 2020, uncovering a number of systemic weaknesses that contributed to the loss of more than $646 million. The state Employment Security Department later recovered about $370 million of the improper payments.
“We have to do a lot of extra work,” McCarthy said, “because there are a lot of extra dollars coming to our state.”
Some federal recovery money goes to the state before flowing down through the Legislature to specific agencies or programs, where the dollars may again trickle down to local governments and businesses. Other federal dollars go straight to the local level. Many dollars that cascade from state to local agencies will get audited twice by different teams.
“We’re looking at it at the state level,” Armijo said, “and in a lot of cases again at the local level to make sure it’s being properly used.”
Evolving guidance on spending
When scrutinizing federally backed spending, auditors must compare how officials used the money with guidance and requirements provided by the federal agencies distributing that money. Scott Woelfle, director of quality assurance and innovation at the auditor’s office, said the COVID-19 crisis resulted in federal agencies pushing out a lot of money without finalizing the rules for exactly how it could be spent.
“It was rolled out as things were being developed,” he said. “Guidance has come out in pieces. [Federal officials] expected people to spend that money quickly.”
With some final rules coming out several months after money has been spent, Woelfle said federal agencies have asked auditors to apply whatever spending instructions were available at the time the money was used. So auditors have had to match spending against fluctuating, point-in-time rules across an array of recovery bills.
“It’s not only been an evolving situation for the people spending the money, but it’s been an evolving situation for auditors,” he said. “You throw in the ever-changing guidance and evolving nature of the programs as well, and it’s created quite a situation the past couple of years.”
The state Office of Financial Management, which provides budgeting support for the governor’s office and Legislature, took on an outsized role in distributing $2 billion in CARES Act emergency coronavirus relief funds across the state in the early months of the pandemic. Assistant Budget Director Nona Snell said that urgent effort, in addition to navigating ambiguous federal guidance, put tremendous strain on her staff.
“It was just an enormous amount of work and it was incredibly stressful because we didn’t have all the rules as we were doing it,” she said. “We were getting information on the fly while there was also a pandemic.”
Snell said the Office of Financial Management sometimes had to make educated guesses on eligible uses and run down a flurry of legal questions. On the back end of that funding, they continue to track those dollars down through state programs and grantees known as subrecipients. The state must file quarterly expenditure reports on many of its federal grants.
Any government or agency that spends more than $750,000 in federal money in a year must undergo a separate federal audit. With so much federal relief flowing down through the state or directly to local governments, many smaller cities have hit that threshold for the first time ever.
Kelly Collins, director of local audit at the auditor’s office, said some of the small governments her division works with have struggled to keep up with reporting requirements and deadlines as they grapple with new rules while also operating remotely under pandemic operations the past two years. Those audits can involve complex requirements to monitor performance metrics or subrecipients of federal dollars.
“I think some of the grant requirements were overlooked,” she said. “We’re seeing several issues across the state.”
Collins said her division completed 368 federal audits last year, but about 100 additional audits remained unfinished at year’s end, when governments needed extensions or hit delays. Those backups pile overdue auditing on top of the already oversized work scheduled this year.
“It’s just a huge amount of work,” Collins said, “and we see that just carrying on.”
Compliance and correction
State Auditor McCarthy said a significant part of the office’s mission involves educating public agencies and helping them adopt best practices for their financial oversight. She wants her office to be a resource for good governance and transparency.
“We’re helping people make sure they have confidence in the people who are running their governmental entities,” she said.
King Country recently got dinged with multiple findings for failing to establish controls to ensure compliance with some federal grants and for spending funds outside an allowed time frame. Benton County had a finding for not ensuring all contractors were eligible for federal work. Auditors included recommendations on how to address those shortcomings in each county’s report.
Agency officials must report any missing money or suspected fraud to the auditor’s office for investigation. Armijo said direct audit work discovers only about 4% to 5% of known fraud, with most suspected misappropriations being identified by the agencies themselves.
Auditors then work with the state Attorney General’s Office and law enforcement to follow up on criminal or legal consequences to theft or fraud at public agencies.
As ongoing audits catch up with previous waves of relief dollars and additional infrastructure money streams to states, auditors across the country expect to see a rise in spending violations and fraud. Armijo said auditors will be targeting high-risk activities for review, like electronic transactions and compliance with subrecipient monitoring.
The amount of recovery money that must pass through multiple agencies has made tracking subrecipients a widespread challenge for agencies and governments, as they distribute grants to local relief efforts. Monitoring the costs and compliance of those grantees creates a tangle of regulations and potential missteps for agencies unfamiliar with the process.
“We know that’s going to be an area,” Armijo said. “It’s also just a common area where pre-pandemic we would find issues. … This is just magnified.”