Report 98118.1 Summary - March 1999

State Board of Equalization:

Budget Increases for Additional Auditors Have Not Increased Audit Revenues as Much as Expected

RESULTS IN BRIEF

Although the Board of Equalization (board) has increased its revenues from audit activities, the increases are significantly less than the board projected. Beginning in fiscal year 1992-93, the Legislature approved 250 auditing positions to supplement the board's audit staff. This was based on the board's assertion that the additional staff would return $5 for every $1 of increased funding for a total of $364.2 million by fiscal year 1997-98. The increased revenue has reached only $241.2 million, however, which is $123 million less than projected. Consequently, the rate of return on the funding is only $3 for every additional $1 spent. When we adjust this figure to consider that the new auditors are generally placed on less complicated, lower-dollar audits and to account for a sales tax increase in July 1991, the true rate of return is closer to $2 for every $1 spent.

The board does not meet its revenue projections for several reasons. Despite the added staff, annual audit hours during fiscal year 1997-98 were essentially the same as they were before the staffing increase. Audit hours directly affect revenues; therefore, lower audit hours mean lower audit revenues. Further, the board has assigned more than half of the new staff to support positions that do not directly generate audit revenues.

We also found that the board's revenue projections have some flaws. First, the board did not consider that new auditors spend less time conducting audits and produce lower-dollar assessments during their first year of employment. Additionally, experienced auditors do not produce audit revenues while training new staff. Another flaw is that the board overestimated the average amount of time auditors actually spend on audits: it used an average of 1,600 audit hours per auditor per year in its calculations, but our review found that auditors average only 1,400 hours per year. Moreover, the board did not always factor in staff vacancies.

Finally, the Legislature asked the board to report on audit program revenues, costs, and staffing. We found that the board's report is sufficiently responsive and generally accurate. However, the information requested for inclusion in the report was not specific enough to allow readers to fully assess the additional revenues resulting from the additional audit positions.

RECOMMENDATIONS

The board should use approved audit positions to conduct audits. If the board determines that the auditors are better used elsewhere, it should report staff reassignments to the Legislature. The Legislature and the board should agree on how to determine the additional revenues that new audit positions will generate. Also, the Legislature should require the board to report any reassigned audit positions.

To project audit revenues more accurately, the board must consider the reduced audit hours and added training costs of new auditors. In addition, the board should base its revenue projections on the actual time staff spend on audits and realistic staff vacancy rates.

Finally, the Legislature should tailor its future requests for information from the board to address specific concerns.

AGENCY COMMENTS

The Board of Equalization generally agrees with our findings, and provided additional perspective and clarification on its use of auditor positions to perform support functions.


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