Review of Service Agency Arrangements

1. Review of Service Agency Arrangements Commission on Government Reform & Restructuring Consolidation Of Shared Services & Enterprise Architecture Committee June 16, 2010

2. Overview • Background • Auditor of Public Accounts • The Review • Observations • Recommendations • Long Term Considerations Auditor of Public Accounts

3. Auditor of Public Accounts The APA serves as the legislative external auditor for the executive & judicial branches of government in the Commonwealth, auditing all • State agencies, • Higher education institutions, • Constitutional officers, • Courts, and • Various boards and authorities. Auditor of Public Accounts

4. Auditor of Public Accounts • Report through the Joint Legislative Audit and Review Commission (JLARC) of the General Assembly. • This structure provides independence from the executive and judicial branch agencies and higher education institutions we audit. Auditor of Public Accounts

5. Organizational Structure Auditor of Public Accounts

6. Areas of Specialization To ensure the Auditor’s Office is qualified to meet its mission, the Auditor has divided the organization into eleven specialty teams, each trained in the specific skill sets needed to perform their tasks. • Acquisitions and Contract Management • Budgeting and Performance Management • Capital Asset Management • Data Analysis • Financial Management • Higher Education Programs • Human Services Management • IT Systems Development • IT Systems Security • Judicial Systems • Reporting and Standards Auditor of Public Accounts

7. Types of Audits • Traditional Financial Audits Examination of the internal controls over operations and over the preparation of an agency’s financial statements • Performance Examination of operations and administrative processes across the Commonwealth and at individual agencies to identify opportunities for improved efficiency and effectiveness Auditor of Public Accounts

8. Other Types of Work • Performance of fraud investigations • Review of the court system • Oversight of local government audits performed by public accounting firms • Maintenance of Commonwealth Data Point Provides public access and transparency to key financial & demographic information about the Commonwealth of Virginia and the operations of state government (http://datapoint.apa.virginia.gov/) Auditor of Public Accounts

9. Background – The Review What were we seeing . . . Agencies of all sizes operating autonomously in all operational aspects. Auditor of Public Accounts

10. Divisions Support Divisions Support Divisions Support Auditor of Public Accounts

11. Larger Agencies Operate Adequately Larger agencies operate adequately in this environment because they have sufficient resources to support both their operational and administrative activities. Auditor of Public Accounts

12. Larger Agencies Operate Adequately • Staff responsibilities are narrowly focused, allowing for strong knowledge base to be developed to perform the function • Funding is available to build IT applications to capture managerial data not available through the Commonwealth’s centralized applications Auditor of Public Accounts

13. Smaller Agencies Face Greater Risks Smaller agencies are not always equipped with sufficient resources, knowledge, or guidance to independently perform these functions. Auditor of Public Accounts

14. Smaller Agencies Face Greater Risks Smaller agencies in some instances struggle to: • Dedicate adequate or sufficiently skilled resources to execute key fiscal and administrative functions • Document desktop procedures to facilitate performance of key controls as well as compliance related requirements. • Provide adequate or fully fund training and cross-training plans • Provide sufficient back-up staff to enable key functions to continue during an absence Auditor of Public Accounts

15. Smaller Agencies Face Greater Risks Budgetary reductions are increasing the likelihood that an agency’s internal control environment could be compromised. Auditor of Public Accounts

16. Smaller AgenciesFace Greater Risks The majority of smaller agencies do not have the resources, expertise, or funding to develop and implement adequate information security programs to protect their critical and sensitive data. “Statewide Review of Information Security in the Commonwealth” (APA 2006, 2008) Auditor of Public Accounts

17. Aging Enterprise Systems Impact Smaller Agencies More Smaller agencies are dependent on the enterprise-wide fiscal and administrative systems managed by the Departments of Accounts, Human Resource Management, and General Services. Auditor of Public Accounts

18. Questions remain . . . Where do you go from here? What is feasible? How can an agency provide quality fiscal and administrative support functions to their business units with limited resources? Auditor of Public Accounts

19. Possible Solution ServiceArrangements Service Center vs. Multiple Service Providers Auditor of Public Accounts

20. Service Arrangement Goals • Leverage the knowledge, skills and abilities of the service center personnel to increase the quality of internal control • Increase the overall efficiency of fiscal and administrative support service delivery • Increase the quality and consistency of fiscal and administrative related information for better decision-making Auditor of Public Accounts

21. Service Arrangement Goals • Facilitate effective knowledge transfer among personnel within the service center and between the agency and the service provider • Ensure sufficient, knowledgeable back-ups are in place for critical roles Auditor of Public Accounts

22. Secretariat Shared Service Center Shared Service Center Solution Auditor of Public Accounts

23. Model Exits Today Within Executive Branch Agencies • Office of the Governor • Office of the Lt. Governor • Governor’s Cabinet Secretaries • Secretary of the Commonwealth • Office of Commonwealth Preparedness • Virginia-Israel Advisory Board • Office for Substance Abuse Prevention • Interstate organizational Contributions • Citizen’s Advisory Council Division of Select Agency Services (Executive Office of the Governor) Auditor of Public Accounts

24. Model Exits Today Within Executive Branch Agencies • Department for the Blind and Visually Impaired • Woodrow Wilson Rehabilitation Center • Rehabilitation Center for the Blind and Vision Impaired • Virginia Industries for the Blind • Department for the Deaf and Hard of Hearing • Virginia Board for People with Disabilities Department of Rehabilitative Services (Health and Human Resources Secretariat) Auditor of Public Accounts

25. Shared Service Center Solution • Each shared service center supports organizations with related operational missions. • Nature of transactions and support services needed to sustain their operations are similar, allowing the service center to maximize the knowledge, skills, and abilities of their personnel to meet the individual needs of the agencies they serve. Auditor of Public Accounts

26. Model Exits Today Within Executive Branch Agencies • Department for the Blind and Visually Impaired • Woodrow Wilson Rehabilitation Center • Rehabilitation Center for the Blind and Vision Impaired • Virginia Industries for the Blind • Department for the Deaf and Hard of Hearing • Virginia Board for People with Disabilities Department of Rehabilitative Services (Health and Human Resources Secretariat) Auditor of Public Accounts

27. Model Exits Today Within Executive Branch Agencies • Office of the Governor • Office of the Lt. Governor • Governor’s Cabinet Secretaries • Secretary of the Commonwealth • Office of Commonwealth Preparedness • Virginia-Israel Advisory Board • Office for Substance Abuse Prevention • Interstate organizational Contributions • Citizen’s Advisory Council Division of Select Agency Services (Executive Office of the Governor) Auditor of Public Accounts

28. Shared Service Center SolutionCritical Success Factors • Service provider and service recipients have worked together to develop key control points • Identified which organization is responsible for which control • Enabled the service provider to take responsibility for key controls Auditor of Public Accounts

29. Single Service Solution • Use of a service agency that focuses on supporting one specific fiscal or administrative function • Allows organizations to outsource specific areas of needed assistance while retaining autonomy over other areas • Requires the organization to develop and manage relationships with one or more service providers Auditor of Public Accounts

30. Single Service Solution Auditor of Public Accounts

31. Single Service Solution • For the use of multiple Single Service providers to be successful: • Clear communication channels need to be established between all entities regarding the agency and its transactions • Coordinated planning among all parties to ensure sufficient monitoring and control points Auditor of Public Accounts

32. Existing Single Service Providers Auditor of Public Accounts

33. Observations • Smaller agencies are identifying their weaknesses and are seeking out support services • 40 of the 60 agencies evaluated as a part of this review currently utilize another agency to perform some or all of their administrative functions • Some are having more success than others in identifying service partners and establishing value-added relationships Auditor of Public Accounts

34. Observations • Sufficient planning is not occurring to support the establishment of a comprehensive and cohesive service arrangement • There is a disconnect between each agency’s expectations as to what they are receiving or providing Auditor of Public Accounts

35. Observations • The degree of success with service agency arrangements directly correlates to: • the quality of the planning done when the relationship is established • the quality of the resulting memorandum of understanding executed between the entities Auditor of Public Accounts

36. Observations • Memorandums of Understanding have been poorly executed • Minimal information has been provided about quantitative controls such as the segregation of duties, authorization responsibilities, coding verification, and compliance consulting • Valuable qualitative controls such as budget monitoring, designated authority/accepted responsibility to question and reject transactions to prevent the agency from having an inappropriate transaction are not part of the agreement Auditor of Public Accounts

37. Recommendation Focus on opportunities for shared service centers, this allows for a more cohesive administrative process. Auditor of Public Accounts

38. Shared Service Centers • Consider implementation on a Secretariat by Secretariat basis • More likely to have similar programs requiring similar support services • Hierarchy to encourage participation and compliance is already in place • Revisit existing relationships within each Secretariat Auditor of Public Accounts

39. Recommendation Develop more comprehensive memorandums of understanding to support the relationships. Auditor of Public Accounts

40. Memorandums of Understanding Expand the substance of the relationship between the agency and service provider to transfer more responsibility for internal controls to the service provider. Auditor of Public Accounts

41. Memorandums of Understanding • The Memorandum should explicitly address: • Functions being supported • Processes to execute the functions • Expected internal controls • Communication channels • Roles and responsibilities of the participants, including costs • Responsibility for policy and procedure development, implementation, maintenance and compliance Auditor of Public Accounts

42. Memorandums of Understanding The Commonwealth’s Agency Risk Management and Internal Control Standard’s program (ARMICS) should • Define each agency’s key areas of risk and desired internal controls • Identify which fiscal and administrative areas would benefit most from a service arrangement Auditor of Public Accounts

43. Long Term Considerations Budget reductions have already captured any savings likely available through the implementation of shared services. Auditor of Public Accounts

44. Long Term Considerations While redundant functions are performed within agencies, redundant positions have already been eliminated by one of the many rounds of reductions in recent years, increasing the Commonwealth’s risk exposure to poorly designed and executed internal controls. Auditor of Public Accounts

45. Long Term Considerations Cost avoidance will also be realized through the implementation of more modern administrative systems, which push the entry of certain data down to the individual employee. Auditor of Public Accounts

46. Questions? Auditor of Public Accounts

47. Contact Information Walter J. Kucharski, Auditor of Public Accounts (Walter.Kucharski@apa.virginia.gov ) Jennifer Schreck, Project Leader (Jennifer.Schreck@apa.virginia.gov) Auditor of Public Accounts