State Auditor; Executive Budget Act.

Subject:

State Auditor; Executive Budget Act.

Requested By:

Edward Renfrow State Auditor

Question:

Does the Director of the Budget or the Advisory Budget Commission have the authority to conduct an operational audit of the current audit and systems procedures employed by the Department of the State Auditor?

Conclusion:

No.

Agenda Item 15 for the July 23, 1982, meeting of the Advisory Budget Commission ("ABC") requested the following action:

"The Advisory Budget Commission’s direction to the Office of State Budget to prepare on its behalf a request for the proposals (RFP) from competent certified public accountants to conduct:

(1) the annual financial audit of the State Auditor’s office, including the Firemen’s Pension Fund; and (2) an operational audit of the current audit and systems procedures employed by the Department of State Auditor."

The minutes of that meeting reflect a discussion of ". . . the preparation of a request for proposals from certified public accountants to conduct a financial and operational audit of the State Auditor’s office. . . ." (Emphasis added)

The question has arisen as to the extent of the ABC’s statutory authority to audit the Department of the State Auditor. More specifically stated, the State Auditor has requested an opinion as to the authority of the ABC to conduct an "operational", as opposed to "financial" audit of his department.

G.S. 143-2 outlines the general purposes of the Executive Budget Act in regard to the supervisory powers of the Governor over the expenditure of State funds. The last paragraph of the section, however, specifically sets out the following exclusions from this control:

"Notwithstanding the general language in this Article the expenditure of funds by or under the supervision and control of the State Auditor, State Treasurer, and Administrative Officer of the Courts for their respective departments shall not, except as provided in G.S. 143-25, be subject to the powers of the Director of the Budget or the Office of State Budget and Management, it being intended that the State Auditor, State Treasurer, and Administrative Office of the Courts shall be independent of any fiscal control exercised by the Department of the Budget and shall be subject only to such control as may be exercised by the Advisory Budget Commission."

This exclusion is repeated verbatim in G.S. 143-28. G.S. 143-25, the exception referred to in these sections, deals with the pro rata apportionment of maintenance appropriations when necessary to prevent a fiscal deficit. There are no provisions in this statute regarding auditing of State agencies.

The statutory authority of the ABC in regard to control over the State Auditor is set out in G.S. 143-4. Paragraph six of this section gives the ABC the following authority:

"Before the end of each fiscal year or as soon thereafter as practicable, the Advisory Budget Commission shall contract with a competent certified public accountant who is in no way otherwise affiliated with the State or with any agency thereof to conduct a thorough and complete audit of the receipts and expenditures of the State’s Auditor’s Office during the immediate fiscal year just ended, and to report to the Advisory Budget Commission on such audit no later than the following October first. A sufficient number of copies of such audit shall be provided so that at least one copy is filed with the Governor’s Office, one copy with the Office of State Budget and Management at least two copies filed with the Secretary of State." (Emphasis added)

The phrase "receipts and expenditures" as used in G.S. 143-4 refers to the type of audit which the accounting profession generally labels as "financial". There is a clear distinction between a "financial" audit and an "operational" audit.

The scope of a financial audit is basically limited to an accounting of how funds have been received and expended. In the case of the State Auditor, a financial audit would review the expenditures of the agency in carrying out its administrative functions in relation to the funds appropriated to it by the General Assembly.

An operational audit, on the other hand, focuses on the internal operating procedures of the client rather than on how money has been managed. The objective of an operational audit is to advise the client as to the efficiency of his operations and to recommend methods for improvement. An operational audit is actually more of a consultant function than an audit function. It therefore appears that nothing in the Executive Budget Act gives the Director of the Budget or the Advisory Budget Commission the authority to conduct an operational audit of the Department of State Auditor.

G.S. 147-58(1), however, states as follows in regard to the duties and authority of the State Auditor:

"1. The State Auditor shall . . . be responsible to the Advisory Budget Commission, the General Assembly and the people of North Carolina for the efficient and faithful exercise of the duties and responsibilities of his office."

This broad language gives the Advisory Budget Commission implied authority to insure that the State Auditor carries out the duties of his office in an "efficient and faithful" manner. It follows that implementation of an operational audit of the Auditor’s Office would be a reasonable exercise of this duty. Therefore, based solely upon the statutory authority granted in this section by the General Assembly, it would be reasonable to conclude that the Advisory Budget Commission would appear to be empowered to carry out an operational audit of the Office of the State Auditor.

An additional consideration, however, leads us to reject that conclusion. In State ex rel. Wallace

v. Bone, 304 N.C. 591 (1982), the North Carolina Supreme Court interpreted the Separation of Powers provision of the Constitution of North Carolina. This opinion held that a statutory amendment by which two members of the House of Representatives (appointed by the Speaker of the House) and two members of the Senate (appointed by the President of the Senate) were appointed to membership on the Environmental Management Commission violated the Separation of Powers provision of the Constitution of North Carolina.

The Court’s analysis of the Separation of Powers clause reaffirmed the principle that the exercise of powers, duties or functions which are essentially executive or administrative by legislators is constitutionally prohibited. It is clear, based upon the Bone decision, that the Constitution must be strictly interpreted to preclude any comingling of the powers of the executive and legislative branches. This principle was reiterated by our Supreme Court in an advisory opinion issued on February 16, 1982, in response to a request from Governor James B. Hunt, Jr., Lieutenant Governor James C. Green. and Speaker of the House Liston B. Ramsey, and was stated by this Office in an opinion to Speaker of the House Liston B. Ramsey, dated February 1, 1982.

Article III, § (7)(1) of the North Carolina Constitution requires that a State Auditor be elected by the qualified voters of the State every four years. The duties and authority of the State Auditor are enumerated in G.S. 147-58. It is clear that these duties are administrative or executive in character and have no relation to the function of the legislative branch of government, which is to make laws. It is therefore beyond the power of the legislature to vest in the State Auditor certain duties and then retain control over the implementation of those duties.

As previously discussed, the objective of an operational audit is to analyze the efficiency of the internal operating procedures of the client. In the present situation, an operational audit of the current audit and systems procedures employed by the Department of State Auditor, as directed by the Advisory Budget Commission, would be an intervention in the administrative functions of an executive agency of State government. Therefore, if the Advisory Budget Commission were determined to be legislative in nature, rather than an arm of the executive branch, such an intervention would be constitutionally prohibited.

The Advisory Budget Commission is created pursuant to G.S. 143-4. Its membership currently consists of 10 members of the General Assembly and two other persons appointed by the Governor. By law, eight of the 12 members must be legislators and four are to be appointed by the Governor. Two of the Governor’s four appointees are presently legislators.

In view of our Supreme Court’s analysis in the Bone decision of the Separation of Powers clause, it is the opinion of this Office that any actions by the Advisory Budget Commission, as presently constituted, which are other than advisory in nature, may be subject to challenge. A directive to the Office of State Budget to solicit proposals and employ an independent contractor to conduct an operational audit of the Department of State Auditor is clearly beyond the scope of an advisory function.

It is therefore our opinion that, in view of our interpretation of the Executive Budget Act and the North Carolina Supreme Court’s opinions in regard to the principle of Separation of Power, neither the Director of the Budget nor the ABC has the authority to direct the Office of the State Budget to request proposals from competent certified public accountants to conduct ". . . an operational audit of the current audit and systems procedures employed by the Department of State Auditor."

Rufus L. Edmisten Attorney General

Grayson G. Kelley Assistant Attorney General