Audit Drama in North Dakota!

Here’s an item sure to pique the interest of audit executives everywhere: the state auditor of North Dakota is in a hissing match with lawmakers there, who just enacted a law requiring him to seek approval from the Legislature’s fiscal review committee before his office conducts performance audits.

The state auditor, Josh Gallion, says he will ignore the law because it violates the state’s constitution, and has a legal analysis from the state attorney general saying so. The Legislature’s top budget analyst, however, says the restriction is law, and will stay in effect until four of five justices on the North Dakota Supreme Court say otherwise.

I’m mostly here for the petty palace intrigue, which state capitols offer in endless supply. Of course, that this is happening in North Dakota makes the spectacle that much more amusing, like Rosencrantz and Guildenstern Are Dead meets an episode of Fargo

Still, we devotees of all things audit should call out the Legislature’s action for what it is — namely, that material found on cow pastures across North Dakota. 


Credit: Bismarck Tribune

According to the Bismarck Tribune, lawmakers snuck that restriction on Gallion’s audit work into his two-year budget earlier this spring. It went into effect with the state’s new fiscal year, which started on July 1. Gallion and lawmakers on the Legislative Audit and Fiscal Review Committee have been sparring with each other ever since.

The restriction says Gallion must seek committee approval before launching “performance audits,” which the Bismarck Tribune describes as “deep-diving probes on specific, fiscal questions.” Then the Tribune gave a gem of an example: the governor’s use of state aircraft, which Gallion audited in 2018

Apparently that audit raised a few eyebrows in North Dakota good governance circles. At least, so said the Grand Forks Herald and also the Fargo Forum last year when the audit was published. Another detail: Gallion launched that audit into Gov. Doug Burgum’s use of aircraft after reports that Minnesota energy company Xcel Energy flew Burgum and his wife to Super Bowl LII in 2018. 

We can all see what’s going on here: Gallion held a powerful politician accountable for questionable judgment, so that powerful politician had his henchmen in the Legislature try to curb the scope of Gallion’s authority.

Auditor Independence Fights Bank

First, Gallion has one big legal argument in his favor: the state auditor is an elected position in North Dakota. So a legislative act to curb Gallion’s independence raises constitutional issues around separation of powers. 

Gallion had asked the state attorney general, Wayne Stenehjem, for his opinion on the law, and Stenehjem pretty much said it would be unconstitutional for that reason. So last week at a state hearing, Gallion politely but firmly told the Legislative Audit and Fiscal Review Committee that he will follow Stenehjem’s opinion, and lawmakers can hoof it.

More broadly, Gallion’s standoff does raise a thought-provoking point: Can a chief audit executive say that to an audit committee? 

In the corporate world, technically the answer is no. The chief audit executive works for the audit committee, and the committee can employ whom it wants. And as we’ve noted before in previous posts about retaliation against compliance and audit executives, some corporate audit committees will indeed send a CAE packing rather than address the misconduct he or she finds. 

Then again, in this specific example, North Dakota’s version of the audit committee (the Legislative Audit and Fiscal Review Committee) is clipping the audit executive’s power to protect an ethically questionable chief executive (Gov. Burgum). 

At most large companies, an audit committee wouldn’t take an action so brazen to protect a CEO under an ethical cloud, because that invites legal liability that no director in his or her right mind would want. 

So while a corporate audit committee could do something like this, I’m hard-pressed to imagine a case at least among large companies where an audit committee actually would. (At smaller companies with less mature governance, or at nonprofits with political constituencies, I’m less sanguine.)

There’s also the question of a chief audit executive needing permission from the audit committee to conduct an audit. (That is what this law requires, after all, whether it’s constitutional or not.)

Again, I suppose a corporate audit committee could impose a rule like that, although I’m hard-pressed to imagine the circumstances where an audit committee would do that. Most audit committee members I know say they rely on the CAE’s knowledge of the organization, with great weight given to what he or she says are the major risks that need attention. 

Also, if the audit leader says, “This is a significant risk that we should audit,” and the audit committee says no, back off — well, I know how I’d take that message. As reason to find the nearest exit, and walk through it.

Ultimately, however, Gallion doesn’t work for North Dakota’s audit committee. He works for the people of North Dakota, who elected him in 2016. They are his bosses. So he’s well within his rights to tell legislators looking to undercut his independence that they can buzz off. Let’s hope the voters of North Dakota see this drama for what it is, and reward the right side when Gallion is up for re-election next year. 

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