Internal audit: Two words that tend to elicit dread in even the most honest person, conjuring images of invasive bureaucrats spending months looking over a school district’s shoulder for cases of fraud and corruption.
Internal audits may uncover a district’s weak spots. But their true value is in demonstrating to the community that a school board is fulfilling its oversight function by enlisting independent and objective assessment of all school system operations and programs and identifying opportunities for improvement.
An effective internal audit can also protect board members and administrators by addressing issues before they become headlines.
“In years past, state law was silent as to the role of an internal auditor in public school districts,” TASB Legal Services Division Director Joy Baskin said. “In 2006, however, the Legislature passed Texas Education Code Section 11.170, which states that if a school district employs an internal auditor, the board of trustees selects the internal auditor, and the internal auditor reports directly to the board.”
In other words, all school district internal audits begin and end with the board, which both initiates internal audits and reviews their results. An internal audit is a way for school boards to effectively execute their oversight responsibilities through an independent and objective lens.
How an Internal Audit Is Different From an External Audit, and Why It’s Important
But just what is an internal audit? In a nutshell, an internal audit is a process that:
- Looks at an organization’s operations
- Identifies potential areas of risk
- Makes recommendations for mitigating those risks from an independent lens
Unlike an external audit, which all districts in Texas are required to undergo annually, an internal audit is designed to investigate the processes and systems of a district.
“The primary difference between an external financial audit and an internal audit is that the external audit tells you if your financial statements are accurate,” said Greg Gibson, principal of Gibson Consulting, “while an internal audit tells you if your processes and systems are working as they should be.”
An internal audit looks beyond your finances to your operations—the “guts” of your organization—with a higher level of rigor and scrutiny than an external audit. An internal audit takes a more holistic look at the many facets of a district’s operations—what is referred to as the “audit universe.”
“The audit universe is simply a list of areas that can be subject to an internal audit and should include every aspect of a school system, including instructional programs,” said Gibson. “Areas that are higher on the list are those that have higher risk to an organization.”
What Should Be Included in an Internal Audit?
One common misconception is that an internal audit should focus primarily on school activity funds. School activity funds make up less than 1 percent of a district’s operating budget. In some internal audit functions, the other 99 percent is largely ignored.
An internal audit can include:
- Academic evaluations
- Operational evaluations
- Administrative evaluations
Determining what to audit can vary from district to district. It’s generally driven by what risks have been identified in a district. These risks include regulatory noncompliance, not achieving objectives, and being inefficient, among others.
But it’s possible for a district to enter the audit process with a good idea of what it wants auditors to examine. In Manor ISD, for instance, the internal audit process began when the board identified human resources (HR) as an area where the board wanted the district to improve.
“We knew we had a system that was not as effective as it could be,” said Manor ISD Board President and Audit Committee Chair Elmer Fisher. Manor ISD uses the TASB Affinity Partner Gibson Consulting Group as its internal auditor.
“Our internal auditor was able to come in and work to get our HR team some help, and, as a result, we’ve seen the department truly blossom,” Fisher said.
The audit enabled the district to streamline processes and find better systems for managing its HR department, according to Fisher. Would he recommend an internal audit to other districts? “Absolutely,” Fisher said. “We have really embraced our internal auditor as a partner of ours to give us some great insight that will tell us what we’re doing well, as well as the things that we could do better. It’s a win-win.”
In Fort Bend ISD, which also uses Gibson, one internal audit project began with concerns over the construction of new facilities.
“When we had a bond program back in 2014, the board used their internal auditor to come in and do what they called a preemptive audit of our construction process to make sure it was in compliance with policy and law,” said Fort Bend ISD Superintendent Charles Dupre. “They found a number of opportunities for us to improve our systems and reporting to help the board govern in a more effective way.”
Audit requests such as Fort Bend ISD’s demonstrate the value of having an internal audit provider with a firm understanding of the varying projects that may come up in the education sector.
Internal Audits Hold the School District Accountable
The outcomes a board may seek from an internal audit are varied, but they generally boil down to wanting to hold the district accountable and demonstrate commitment to continuous improvement.
As the demand for transparency has increased, an internal audit provides districts with an outside, independent, third-party assessment of a district’s procedures and operational policies.
“As superintendent, I can tell you, it’s an important part of the board’s governance function to make sure that we are doing what we’re supposed to be doing in the right way,” said Dupre. “In my role, I’ve got to lead a very large staff, and I cannot have my finger on the pulse of everything that happens every day. I’ve got good people, but none of us are perfect. So, to me, it’s just another accountability measure that helps me, the board, and the community know that we’re doing the right things in the right way.”
That accountability component extends beyond district leadership, too. Demonstrating commitment to continuous improvement lets the community know that the board is a good steward of the tax dollars that have been granted to it.
In Fort Bend ISD, having a transparent relationship with the public has become a crucial part of how the board operates.
“Our view of internal audit at Fort Bend ISD is that it’s part of our continuous improvement efforts,” Dupre said. “It’s part of the board’s governance function to do internal audits to make sure that things are operating the way they should.”
Maintaining that level of transparency, Dupre believes, affects a district’s relationship with the community. In Fort Bend ISD, when an audit is completed and the results are shared, the board takes one step further and shares the detailed audit report on the district’s website.
“Because everything is so transparent and public, any member of the community can see what we are doing and know that the board is doing their job,” Dupre said
Following Up on an Internal Audit and Tracking Progress
Once an audit is completed, though, there is still follow-up work. You don’t get the full value of an internal audit unless you do something with it.
The next step is for the board to put processes in place to track the progress of implementing any changes recommended in the internal audit report.
Tracking the implementation increases the accountability of an organization. Boards can even call for a follow-up audit—and report back to the board audit committee within an agreed-upon timeline.
From initiating an audit to overseeing the audit process to monitoring an audit’s results and implementation, it is the board’s role to manage the internal audit function.
Despite the work it requires, internal audits are not only worthwhile, but also essential to the governance process.
“It’s always a win-win, because you’re able to put processes and systems in place that make the school business more efficient and effective for children,” Fisher said.
And that’s what this is all about.