Federal inspector general oversight and audit report generation challenges

Organizational Behavior -- Case Study

Organizational Background

Under the Inspector General Act of 1978, every United States federal agency and federal program is subject to the oversight of an inspector general (IG) with appropriate jurisdiction (CULS, 2011; Edwards, Wattenberg, & Lineberry, 2009). Generally, the office of inspector general (OIG) monitors compliance with applicable federal rules, laws, and regulations, in addition to conducting financial audits to ensure that federal funds allocated to federal agencies and to programs under their jurisdiction are spent appropriately as intended by their respective programs (Damp, 2007). Generally, the IG of each agency maintains it headquarters in Washington within the headquarters of the agency and varying numbers of regional and field offices elsewhere throughout the nation, depending on the size of the agency. For example, a very large federal agency such as the U.S. Department of Health and Human Services (USDHHS or DHHS) maintains regional offices in all eight federal regions in addition to field offices within some of those individual regions. Each regional office is headed by a regional inspector general (RIG) who reports directly to the agency's Office of Inspector General (OIG) headquarters in Washington (Edwards, Wattenberg, & Lineberry, 2009).

Every year, the various regional OIGs conduct compliance audits and financial audits of the programs and state and local agencies that are subject to federal agency oversight by law or that receive federal funds (Edwards, Wattenberg, & Lineberry, 2009). The regional DHHS OIGs conduct audits of both national and regional (or local) agencies and programs. In recent years, the audit report generation process has been plagued by several problems that have interfered with collaborative morale in addition to greatly delaying the report production and issuance process. Some of those problems relate to a lack of timely planning and coordination among and between the regional field offices; others that have been identified pertain to the leadership style and organizational culture that have developed in certain offices in particular. In addition, prior to 2007, there were fundamental motivational issues related to the nature of the compensation scheme for U.S. Federal Agencies that undermined employee motivation.

Organizational Issues Presented

Organizational Problem #2 -- Regional Leadership Style and Organizational Culture

In Federal Region II, consisting of New York State, New Jersey, and the Commonwealth of Puerto Rico, there have been problems with the New Jersey field office. The Region II RIG is located in the Regional headquarters in lower Manhattan. He oversees three Region II field offices in Albany, NY, Trenton, NJ, and San Juan, Puerto Rico. In the New York RIG headquarters, there are three audit managers, each of whom reports directly to the RIG. In Albany, there are three managers; and in Trenton, there are two managers. The San Juan regional office is managed by one of the regional managers in Albany.

Generally, the managers within each regional office work well together, each of them managing two or three audit teams. Sometimes all of the audit teams managed by one manager work on different investigations; other times, they collaborate on a single large audit. There are also Region II audits that involve multiple audit teams from different field offices, such as where the same potential audit issues arise simultaneously in New York and New Jersey state agencies. However, in New Jersey, there was a serious problem that arose because of long-standing rivalry and thinly-veiled animosity between the two regional managers. Their mutual personal antagonism caused the evolution of an unproductive rivalry between their respective audit teams, particularly when they were assigned to the same investigations. In many cases, the two audit managers purposely interfered with collaborative efforts and tacitly encouraged antagonism and rewarded audit teams and individual auditors who followed their leads. As a result, audits often became problematic in New Jersey and the entire report process of Region II audits was often delayed because of this issue in the Trenton regional office.

Organizational Problem #3 -- Federal Compensation and Employee Motivation

For decades, civilian federal agencies relied on a compensation scheme that failed to compensate employees who performed well and (in effect) only recognized poor performance (George & Jones, 2008; Giuliani, 2002; Robbins & Judge, 2009). In principle, this is not uncommon and has long been criticized as a reason that the performance and motivation of many public-sector employees is less than optimal. In that regard, the classic observation is that public sector employees typically work only as hard as necessary to avoid getting fired because they have little incentive to work any harder. The specific performance evaluation system maintained by the federal OIGs (and the rest of the U.S. executive branch of government) consisted of performance ratings of either "meets or exceeds expected performance standards" or "fails to meet expected performance standards (Damp, 2007).

All employees who meet expected performance standards receive nominal annual "within-grade" salary "step" increases (i.e. 2 or 3%) and progress along a standard career promotional track according to which they rise one "step" within their grade until they reach the next highest grade or until they are promoted to the next highest grade. Within step raises and advancement was automatic provided the employee met or exceeded expectations; promotion was automatic at the highest step of each grade or strictly discretionary based on the decisions of the RIG (Damp, 2007). As a result, federal employees within HHS had little incentive to do any more than the minimum necessary to maintain their good standing and continuous step increases except perhaps where they believed they were on the cusp of an out-of-grade promotion by the RIG. In addition to working less hard than they were capable, many HHS-OIG employees left the agency for private sector jobs in a pattern that cost the agency money and other valuable resources in recruitment, training, and audit team reorganization on a regular basis.

Solution to Organizational Issues Presented

Organizational Problem #1 -- Lack of Inter-regional Collaborative Audit Planning

On several occasions throughout the years, the IG staff in Washington HHS OIG headquarters became very annoyed at the obvious difference between the efficiency and timeliness of IG-assigned investigations on one hand, and individual regional-conceived investigations on the other one hand. Eventually, the IG in Washington realized that the solution was fairly simple: simultaneous regional investigations should never have been authorized without a collaborative investigation or audit planning process that involved all regional OIG components pursuing a similar investigation. Whereas the IG-assigned investigations and audits were carefully coordinated by the IG, the investigations and audits undertaken independently by the RIGs in each region lacked any coordination. As a result, it was virtually certain that their respective approaches and report organization would be different. By allowing the different regions to conduct their own investigations and draft their own preliminary reports before furnishing them to the IG in Washington, valuable time and resources were being lost. The IG decided to apply a uniform approach to all investigation and audit planning so that all independent regional procedures and organization would mirror one another the same way they did anytime they participated in IG-assigned work.

Organizational Problem #2 -- Regional Leadership Style and Organizational Culture

The problem in Trenton was resolved by the direct intervention of the Region II RIG. Specifically, he identified the problem as being caused by the toxic nature of the rivalry between the two Trenton managers in conjunction with the prevailing custom within the OIGs that audit teams always be assigned to one manager for the long-term. Generally, that is a beneficial arrangement because it promotes long-term relationships between supervisors and subordinates and enhances their efficiency as teams. In this particular case, the RIG realized that the prevailing custom leant itself to well to the climate of antagonism and to a competition between the audit teams of the respective managers that was neither productive nor conducive to the optimal organizational climate within the office. The RIG imposed an audit team rotation rule according to which the RIG would assign the audit teams to one manager or the other for every project. The principle purpose was to prevent the audit teams from developing any allegiance to one manager or the other. Furthermore, to start the office out from a new neutral position in this respect, he mixed up the existing audit teams themselves to ensure that any relationships and (especially) inter-team rivalries that had developed previously were extinguished. Finally, the RIG also met privately with all of the senior auditors on each new audit teams and with the two managers and instructed the senior auditors to report any inappropriate rivalry or antagonism promoted by either manager and indicated that no reprisals of any kind would be tolerated in connection with those reports. Since that series of changes, the Trenton regional office has not caused any delays or problems in investigation or report generation processes.

Organizational Problem #3 -- Federal Compensation and Employee Motivation

In late 2006, the executive branch of the U.S. federal government authorized a new employee evaluation and compensation scheme (Damp, 2007) that was immediately adopted by DHHS. Specifically, employee evaluations would no longer be limited to the "meets or exceeds expected standards" or "fails to meet expected standards" system. According to the new system, HHS employees (including HHS-OIG employees) are now graded on a scale of "Unacceptable"; "Minimally Successful"; "Fully Successful"; and "Exceptional" (Damp, 2007).

In addition to providing a means for employees to distinguish themselves through high performance, the new federal regulations also authorized financial bonus rewards for employees whose overall performance rating for the entire fiscal year met the "Exceptional" standard. The amounts of those rewards are determined by the agency official in charge (in this case, the RIG) and awarded from any annual budgetary surplus in the agency's fiscal allocations for the previous year (Damp, 2007). As a result, HHS-OIG employees now have a much greater natural incentive to perform to their highest abilities. Previously, the primary incentive of most agency employees was simply to perform well enough to reach the "general working civilian grade" of GS-12, since most of them are hired at the GS-7 to GS-9 grade.

That is because while within-grade salary "step" increases are merely a function of "time in grade" (generally one year), promotions to higher working grades was the only attainable goal for all HHS employees below the supervisory grade of 13 or the managerial grade of 14. Since the available 13 and 14 grades are limited by the needs of the office, promotion beyond Grade 12 is usually coordinated with the expected promotion or retirement of current Grade 13s and 14s. Therefore, most Grade-12 HHS employees would typically coast out their careers unless they had particularly strong aspirations to progress into management. Meanwhile, the backbone of the agency is precisely those Grade 12s.

Since the new employee compensation and evaluation regulations and standards took effect, there has been a marked difference in the performance of HHS employees across the board, but especially among the Grade-12s. First, it is no longer possible to attain the highest recognized level of performance by simply doing average work. More importantly, there is now a financial incentive associated with superior performance since only employees rated "Exceptional" are eligible for end-of-year financial bonuses. Likewise, the new system promotes a beneficial relationship between supervisors and subordinates with respect to career development that is highly conducive to both individual and organizational success (Kinicki & Williams, 2005; Maxwell, 2007). As a result, productivity and employee morale have improved significantly.