Testimony Before Selection Committee

David R. Hancox

State Comptroller

Testimony before Selection Committee

David R. Hancox, CIA, CGFM

Hamilton Hearing Room B
LegislativeOfficeBuilding
Tuesday, January 23, 2007
9:30 a.m.
Albany, New York

Thank you Comptroller Goldin, Comptroller McCall, Comptroller Regan and members of the Assembly Standing Committee on Ways and Means and the Senate Standing Committee on Finance for giving me the opportunity to present my qualifications for the position of New York State Comptroller.

As a 32-year career employee in the State Comptroller’s Office, I’ve been privileged to work for four comptrollers, starting with Comptroller Arthur Levitt. In addition to being on the faculty of SienaCollege and the Federal Government’s Audit Training Institute in WashingtonDC,I’m a Certified Internal Auditor (CIA) and Certified Government Financial Manager (CGFM).I’ve co-authoredtwo books on government auditing and management practices with Mr. Marty Ives, a former State Deputy Comptroller and First Deputy Comptroller in New York City. I’m an international speaker in demand in the government audit and financial management community on audit and management-related topics.

I know about New York’s financial management and I know the Comptroller’s Office and its culture.

The office has a long and distinguished history going back 210 years to 1797. What distinguishes the Comptroller’s office in New YorkStateare its constitutional and statutory responsibilities.

Under the State’s constitution, the requirements are simply stated. The comptroller shall be required: (1) to audit all vouchers before payment and all official accounts; (2) to audit the accrual and collection of all revenues and receipts; and (3) to prescribe such methods of accounting as are necessary for the performance of the foregoing duties.

In addition, the laws give the Comptroller many powers. For example, the Comptroller:

Is the sole trustee of the huge employees retirement system which covers all state and many municipal employees
Oversees the fiscal affairs of all its local governments, including New York City
Audits the performance of every state agency and public authority
Manages all of the cash flowing into and out of the state treasury
Reports on the financial position and results of the State’s financial operations
Provides guidance on the internal control systems over the state’s financial management practices

In short, this office oversees the people’s money. The Comptroller’s job is to make sure the State of New Yorkknows how much money it has, to report on how well that money has been spent and to protect and grow the pension funds for current and future retirees.

As such, the Office of the State Comptroller requires the attention and focus of consummate professionals who have the job disciplines needed to meet these mandates. The Comptroller's Office primary policy setting role is in the financial management practices of New YorkState and its retirement system. We need a Comptroller with the knowledge, skills, ability and credentials to focus on the constitutional and statutory duties and to make sure the right people are in place to carry out the mandates. I pledge to make sure the Comptroller's Office has the staff in place to carry out its mandate in the independent and professional manner intended by the law and constitution.

Currently, the Office has many competent and skilled people at all levels. At the senior levels though, those core skills and abilities are not always aligned with the core functions of the Comptroller’s Office. The current Office is a hierarchical, highly structured organization; I willsimplify the organizational structure to ensure responsiveness and accountability. Organizational structures send powerful messages about who you are and what you do. When competent career professionals have to go through many organizational layers before reaching the State Comptroller you can understand the bureaucratic challenges – communication gets confused and decision-makinggets frustrated and delayed.

Part of our Office has moved beyond its core functions. When the Division of Investigations plays a more important role than the various audit bureaus, the core functions of the Comptroller’s office become secondary. Investigators are important to the audit process and need to be properly integrated into the audit function, but the Comptroller’s Office is not an investigative office – it’s an audit office, an accounting office and a financial management office. There are other examples of similar mission creep, but our goal should be to understand the constitutional and statutory requirements and assure those requirements are met competently and professionally.

The various audit functions of the Comptroller’s Office currentlyare dispersed in separate divisions and even in separate bureaus within divisions. This creates a silo effect, makes comprehensive audit planning difficult, and precludes leveraging resources to high priority areas. It also results in administrative overlap and duplication of effort that are not cost effective. For example, our municipal auditors and state auditors are in two different divisions – each with extensive training offices and support units. Our auditors of state expenditures are in a different bureau from the state auditors within the same division, but they have complementary roles and in some cases, there are duplicate efforts.

We need to consolidate the audit functionsand recognize that multiple prioritiesneed to be met, such as our school audit initiative. Consolidating doesn’t necessarily mean combining. It does mean putting the right organizational structure in place to meet core functions and priorities.

As Comptroller, I will be the people’s watchdog and carry out that role with dignity and respect for the people we oversee. I also know the role must be carried out with ethics, integrity and independence. As a student and teacher of the auditing profession, I have studied the great frauds that have occurred. The common link is not the lack of policies and procedures, but rather managers who decided they were going to override the system of controls. Arrogance is at the root of the major corporate and government scandals.

As sole trustee of the pension fund, I would stick to the principle of providing the best return consistent with maintaining the safety and integrity ofthe funds for our retirees. I would insist that the people we hire to aid our efforts with our retirement fund and investmentoperations understand their ethical obligations to the public and the employees of the Comptroller’s Office.

I am an independent and objective public servant.I owe no political debt to any person or group. I will exercise prudence and due care in carrying out all the Comptroller’s functions, with particular emphasis on our cash investments and retirement funds.

A Future Direction

While past skills and experience are important, a vision for the future is critical. As a person who has been called upon to bring about substantive change in various operations of the office including the State Expenditures Bureau, the Medicaid unit, travel regulations and other matters, I do know broader changes are needed in the office.

I would concentrate effort in four areas:

Achieve maximum value for taxpayers by auditing state agencies, public authorities and municipal governments using a risk-based approach.
Maintain close fiscal oversight overstate agencies, public authorities and municipal governments to ensure the prompt detection of fiscal stress and to provide meaningful measures of performance in financial management practices where appropriate.
Oversee the investment of the State’s assets and pension funds to assure a reasonable return consistent with the safety and integrity of those assets.
Continue to develop the technology that will best deliver value to our stakeholders.

The Comptroller's Office is steeped in tradition with accounting systemsand practices that worked well in the past. We need to improve these systems to embrace risk-based decision-makingthat progressive managers are usingtoday. I will bring an enterprise-wide,risk-based model to all activities in the State Comptroller’s office. The volume of transactions from payroll to expenditures, contracts, and retirements requires the limited number of people in these units to understand where the real risks exist and how to focus resources in the right areas.

Previously, I was Director of State Expenditures and headed up a 115-person unit responsible for auditing more than $70 billion in transactions a year, with many thousands of transactions a day coming through the system. We transformed this unit from a labor-intensive, clerical audit operation to a modern, risk-based professional audit unit, using the latest audit techniques to find fraud, waste, and improper transactions. The same concepts need to be carried out in other areas in the Office.

The Comptroller should provide decision-makers with information they value and need. The State's central accounting system is outdated and ineffective. At the agency-level a variety of financial management systems have evolved in a disconnected and ineffective manner. Consequently, New YorkState lacks a comprehensive accounting system to provide the types of financial information decision-makers need. It is unclear at this point whether the new accounting system we are putting in place will be coordinated with the many and diverse agency financial management systems. As Comptroller, I will work with the Governor and the executive agencies to make sure one integrated and seamless system exists. In today’s environment, legislators ought to be able to sit at their desks and obtain real-time information about the financial management practices of any agency we fund. Currently, you have to go to a variety of sources to understand spending practices.

Similarly, we need to develop a comprehensive set of measures for evaluating the effectiveness of financial management practices at state agencies. New Yorkshould be a leader in reporting performance measures. We should be able to tell you and the citizens on an on-going basis, whether agencies are:

paying staff correctly.
paying vendors on time as required by law.
adhering to contracting and competitive bidding requirements, or
circumventing the law by splitting purchases to avoid bidding requirements.

Based on such reporting we could better serve the public. Concerted efforts could be made towards improving agency operations through training and outreach – or holding accountable those managers who consistently thwart the laws, rules and regulations of New York.

One of the more challenging costs to municipal and state government is to fund properly the costs of current and future retirees – both pensions and post-employment health care costs. This is a focus of the government accounting standard setting body and must be a focus of the Comptroller’s Office. We need to continue to assure municipal governments are billed consistently for pension costs to avoid surprise large increases in billings. We need to help them anticipate other future costs so they can manage and plan to avoid fiscal stress. It’s important the Comptroller bring to bear the brightest minds to help with these challenges. Good investment advisors, accounting advisors and meaningful independent audits of investment practices can all contribute to improved accountability.

Many other issues need to be the focus of an incoming Comptroller. Some of these include:

The frauds that occurredin the private sector were not the result of a breakdown in process or procedures. They were the result of unethical behavior that may have been detected with the right tools and a totally objective audit process. New YorkState deserves these kinds of assurances from its audit function. The Comptroller’s auditors should assess the attitude, philosophy, operating style and the ethics of the managers of state agencies, public authorities and local governments in an objective and comprehensive manner. It is the cause of many problems.
We need to continue being a voice at stockholder meetings. We need to promote and assure good corporate governance. For example, a Chief Executive Officer should not be the chair of the Board of Directors. Working with other large pension funds, we can have an impact that will improve returns and continue to clean up corporate governance.
Security over New York’s computer networks and resources is paramount to our government’s success, yet only a small percentage of audit resources are devoted to this area and even a smaller percentage of audit staff are trained and capable to address it. Much more focus is needed.
The Comptroller’s office needs to work in a cooperative way with investigative agencies, such as the Attorney General’s Office and County District Attorneys when necessary, providing them financial expertise. This needs to be a cooperative effort - not a competitive effort. Information sharing should be paramount.
We may need to examine the laws that call for cooperating with the Comptroller’s office. Some agency officials in the past have tried to prevent or delay the Comptroller’s audit function. Thwarting that function thwarts accountability.

Conclusion

Appointing me to the State Comptroller’s position would send a powerful message to the employees of the Comptroller’s Office, other career public servants and the public we all serve.

Public employees would get a clear message that the professionalism and skills they deliver daily are appreciated by the Legislature and that they hold the key to the ultimate success of our government.
The public would receive a clear message that a financial professional is going to restore the historic role of the office with dignity, respect and integrity. I’m someone who has learned lessons from four Comptrollers – I know the powerful message that must be conveyed.

My appointment would be based on the quality of the skills I’ve gained in 32 years as an accountability professional– not on any political affiliation. That’s a powerful message to send to the public at this critical juncture in our history.

Thank you for hearing me.

Biography

Mr.Hancox is Director of State Audits in the NYS Comptroller’s Office. He is currently leading an effort to measure the performance of state agencies’ financial management practices to guide future audit efforts and to increase the effectiveness of agency operations.

Previously, he was Director of State Expenditures. He headed up a 115-person unit responsible for auditing more than $70 billion in transactions a year, with many thousands of transactions a day coming through the system. He has transformed this unit from a labor-intensive, clerical audit operation to a modern, risk-based professional audit unit, using the latest audit techniques to find fraud, waste, and improper transactions.

Mr. Hancox and his audit teams have saved taxpayers millions of dollars and helped change the way New YorkState operates. His team’s recent audit of sex offenders getting Viagra on the Medicaid program received international attention and brought about change at the national and state level. Prior audits found fraud and waste in other major programs that resulted in significant savings to the taxpayers when the problems were corrected.

He is co-author of two books: Government Performance Audit in Action and State and Local Government, Program Control and Audit: Handbook for Managers and Auditors. He is on the faculty of Siena College and the Government Audit Training Institute - GraduateSchool, USDA.

He is an international speaker and frequently in demand in the government audit and financial management community on audit and management-related topics. He is past regional vice president of the Association of Government Accountants and a past president of the New York Capital Chapter of that organization. He is currently on the National Emerging Issues Committee. He is also past president of the Albany Chapter of the Institute of Internal Auditors and a past member of the International Government Relations Committee. Dave contributes articles to various professional journals that challenge the traditional audit approaches that have failed to find the fraud in major organizations. He's listed in Marquis's Who's Who in the World, Who's Who in America, and Who's Who in the East. He is a Certified Internal Auditor and a Certified Government Financial Manager.

In 2005, the Association of Government Accountantsselected him as the Educator of the Year.