Regulatory Inspection Programs
Through state and local government departments responsible for consumer affairs, environmental protection, agriculture and markets, health, and other activities, and federal agencies such as the Labor Department and the Nuclear Regulatory Commission – governments play a major role in protecting the public against risks to their health, safety, and welfare. Based on specific laws and regulations, governmental agencies protect the public – as consumers, as citizens, as employees – primarily by means of registration, licensing, and inspection.
Often, legislation directing governmental registration, licensing and inspection of commercial (and even residential) establishments results from public outcry in response to tragedy, consumer fraud, or other unwarranted imposition on the health, safety or welfare of the person. Here are just a few types of governmental agencies that regulate specific entities and funcions:
- a food inspection activity may help protect the public health from food-borne illnesses by licensing and inspecting food producers, processors, manufacturers, distributors, retailers and warehousers to ensure compliance with sanitary standards;
- an environmental protection activity may monitor the quality of our air, water and land by regulating and inspecting entities that create and discharge hazardous wastes, and handle solid waste or other environmentally sensitive materials;
- a consumer affairs agency may inspect taxicabs for accuracy of meters as well as safety and cleanliness of the vehicles; or test scales at grocery stores or pumps at gasoline stations for accuracy of weights and measures;
- a buildings regulation agency may inspect electrical, plumbing, boiler and elevator installations; periodically reinspect the elevators; and respond to complaints about the structural integrity of buildings.
Although the specific functions covered by regulatory inspection programs may differ, the goals and objectives of these programs, the risks faced by program managers in overseeing these programs, and the control practices they implement in response to their risk assessment are generally similar. In this chapter, we will develop a general approach to the performance audit of regulatory inspection programs. We will do this by discussing:
- the goals and objectives of such programs,
- the risks program managers face in administering their programs,
- the kinds of controls and operating strategies managers may use to help achieve the objectives of the programs, and
- the specific procedures performance auditors might take after making an initial survey of the program objectives, risks and controls.
Understanding the Goals and Objectives of Regulatory Inspection Programs
As with any other performance audit, it is useful to distinguish the broad long-term goals and shorter-term objectives from the strategies that have been designed to achieve the goals and objectives. Separating the results intended to be achieved from how they are to be achieved helps you understand the kinds of measures or indicators needed to assess program performance. It also helps you understand the risks that managers might consider in designing strategies to achieve the program goals.
Goals, objectives and strategies might be expressed in narrative or in quantitative terms. They may be expressed in legislation, in legislative “findings” or executive department proposals for legislation, in executive budgets proposing appropriations for a particular year, in agency requests for appropriations, or in departmental regulations or action plans. For example, the long-term goal of a food regulation program – to protect the public health by minimizing the incidence of food-borne illnesses – might be expressed in specific legislation establishing a food inspection division within a state’s department of agriculture. The year’s objective – say, to reduce the number of persons affected by food-borne illnesses by 20% from the previous year – might be expressed in the governor’s budget. To help meet this objective, the agency’s budget might request (and the legislature might appropriate) funds for four additional inspectors so that a total of 1,500 inspections will be made during the year.
As part of the audit planning process, the performance auditor needs to understand the legislation establishing the program, the factors leading to the legislation, and the managerial considerations (including the risks that were considered) leading to the budgetary requests. In the foregoing illustration, the auditor should recognize, for example, that the original legislation contained a broad goal of minimizing food-borne illnesses; that the budget and the related appropriation contained a measurable objective of reducing illnesses by a specific amount from the previous year (an outcomes indicator); that agency managers had to consider various strategies (and the risks attached to each strategy) before deciding to seek four more inspectors; and that agency established an outputs indicator of 1,500 inspections designed to help achieve the objective of reducing food-borne illnesses by 20%.
Budgetary and legislative processes differ among governmental jurisdictions and even among programs within a specific jurisdiction. For example, governments may not always establish specific outcomes measures. Some governments may establish the frequency of required inspections (say, annually) directly within the law creating the inspection program. For other programs, the legislation may simply establish a requirement for inspection, leaving its frequency to the judgment of the chief administrator.
Understanding the Risks to Effective and Efficient Regulatory Inspection Performance
There are major risks to effective and efficient performance of regulatory inspection programs. These risks need to be considered and evaluated both by the managers responsible for the program and by the auditor making a performance audit. Managers need to assess risks and costs in developing alternative strategies intended to accomplish the mission goals and objectives and in designing control systems to provide reasonable assurance that the goals and objectives will be achieved. The performance auditor needs to understand the managers’ risk assessment process and, in developing an audit program, make his/her own assessment of the likelihood and impact of negative events. Here are some of the risks faced by managers of regulatory inspection programs that also confront the performance auditor.
o The risk of lack of direct correlation between the desired result (improved public health, safety and welfare) and the inspection strategies designed to achieve that goal. Inspection is costly because it is labor intensive. It is based on the presumption that inspection will deter negative events or correct the conditions that cause negative events in sufficient time to keep them from happening. But honest entrepreneurs may be just as honest without the inspection program, and dishonest entrepreneurs may continue being dishonest regardless of the inspection program. So inspection strategies need to be combined with other strategies, such as fines where appropriate, tougher fines for repeated violations, and prompt follow-up to assure correction of violations and payment of penalties. Even then, no matter how effective the inspection and penalty program, it is impossible to reduce risks to zero – to prevents “acts of God,” to keep out all contaminants, to prevent all instances of consumer fraud.
- The risk of developing strategies and procedures that are not cost-beneficial. Establishing cost-beneficial inspection strategies results partly from innovation and partly from risks that managers are willing to take. Two managers faced with the same inspection workload may seek vastly different numbers of employees to perform the assignment. The one who can do it with less staff is the one who recognizes that additional increments of cost may not produce proportionate benefits; such a manager will willingly redesign the detailed inspection procedures so as to detect the more serious violations, and reconfigure the inspection program to devote relatively more staff to those facilities likely (based on previous experience) to have the more serious violations. That manager will also find ways to reduce travel time between inspection locations and use new technology to assess inspection results and maintain inspection records.
- The risk of inefficient or ineffective inspection procedures. Although some inspections may be done at central locations, where employee performance can be readily monitored, most are made in the “field” by individual inspectors. “Field work” provides opportunities for the dishonest employee to goof off or to succumb to bribery; it also provides opportunities for the untrained or ineffectual employee to do slipshod work. This means that management needs to establish adequate training programs, procedures for effective supervision of the quantity and quality of employee work output, and salary scales, promotion opportunities and other procedures that will enhance morale and deter fraudulent employee behavior.
Understanding the Control System and the Operating Strategies
Let’s assume you now understand the goals and objectives of the regulatory inspection program that you are about to audit and you have some perception of the risks to the efficient and effective accomplishment of those goals and objectives. Before establishing your detailed audit program, you will want to get a general idea of strategies and the controls established by management to accomplish the program goals and objectives. Your understanding of the details of the strategies and controls will increase as the audit progresses, but having a working knowledge of them will help you decide which areas seem most vulnerable to problems. This is the kind of control system that you might see in a typical regulatory inspection program.
1. Controlling the Inspections and the Inspectors
The work of the inspectors is a major aspect of any regulatory inspection program. Managers need to plan and control the hiring, training, scheduling, and supervising of inspectors to maximize their productivity and to reduce the risk of dishonest behavior.
a. Quantity of Inspections to Be Made
- The number of inspections to be made in a particular year depends on the number of facilities to be inspected, the desired inspection frequency, and other factors such as re-inspecting facilities with serious violations or scheduling inspections in response to citizen complaints.
- The starting point for control is the inspection census – a complete and current listing of all facilities subject to inspection. Generally, licensing and registration requirements provide the initial basis for the inspection census. However, there is no assurance that all facilities required to be licensed or registered have actually filed. Some governmental units try to ensure completeness of their inspection files by making periodic computer matches with relevant data (such as property tax files) maintained by other governmental units.
- The frequency of inspection may be established by law or regulation by a higher level government, or left to the judgment of the inspecting agency’s chief administrator. Laws and higher level government regulations can be changed, perhaps after demonstrating that the inspection activities are achieving the program goals. When inspection frequency is left to the judgment of the agency administrator, the administrator needs to weigh the costs of inspection against the risks of insufficient numbers inspections. This means the administrator needs to consider (and continuously reconsider) such factors as: the events leading to initiation of the program; the number and seriousness of violations found on previous inspections; the extent to which program goals are being achieved as a result of the inspection program; and the nature and extent of citizen complaints.
b. Number of Inspectors Needed
- The number of inspectors needed to conduct an inspection program depends on the number of inspections to be made and the length of time it takes to make an inspection of the desired quality. How long it should take to make an inspection depends on many factors, such as what needs to be inspected, how it should be inspected, the number of items to be inspected at a given facility, and the conditions encountered during an inspection. To determine the number of inspectors needed to conduct a program, a manager must also consider the amount of time it takes for an inspector to travel from one site to another. Travel time may differ considerably between urban and rural areas of a state.
- Determining what to inspect and how the inspection should be conducted leads to the development of inspection procedures manuals and time standards for various types of inspections. Despite the difficulty of the task, establishing inspection time standards is a key element of the control process. It forms the basis not only for determining the number of inspectors needed, but also for determining inspector productivity.
- Regulatory inspection programs differ and some inspection programs are more likely to lend themselves to innovation than others. (For example, inspection of elevators may require a similar routine for each inspection, based on a check-list of items to be inspected. “Cutting corners” in an elevator inspection might lead to tragedy. On the other hand, inspection of sanitary conditions at food establishments might lend itself to “spot checking” because the very presence of an inspector may accomplish the desired result.) Further, experience may cause inspectors to develop less time-consuming methods of making an inspection than originally anticipated.
Management Innovations Can Reduce Inspection Costs
- A state inspection activity, faced with staff shortages because of budgetary cutbacks, used its automated data system to track inspection history in order to assess the risk of not making inspections in the frequency originally anticipated. The manager was able to improve inspection effectiveness and efficiency by increasing inspection frequency at some locations and decreasing it at others.
- The chief of an inspection activity compared inspection productivity by region within a state; analyzed reports accounting separately for inspection, travel and administrative time; found out why some regions were more productive than others; and increased overall efficiency by tightening time standards and counseling inspectors and supervisors in the less productive regions.
- Analysis of travel time enabled an inspection activity to increase productive inspection hours by more than 5% in one year.
c. Hiring, Training and Supervising the Inspection Staff
- Unfortunately, certain types of inspection activities lend themselves to corruption. This is due, in part, to the “fieldwork” nature of inspection, the “one on one” relationship between the inspector and the inspected, and the potential for significant cost to correct violations disclosed by inspection. The program manager therefore needs to adopt personnel and supervision policies that are likely to reduce the potential for corruption. This may include: careful screening of applicants for inspection positions (certain types of personnel tests may help to weed out the unethical); pay scales and promotion opportunities that are commensurate with similar positions in industry; rotation of employees among organizations inspected; and periodic refresher courses designed to encourage professional attitudes and maintain quality.
- Supervision is one of the most important elements of the inspection process. Effective supervision helps to promote productivity, ensure work of the desired quality, and reduce the potential for corruption. This means that line supervisors need to spend most of their time in the field, not in the office. A supervisor might, for example, reinspect a sample of the facilities a day or two after they have been inspected – a practice that should be made known both to the inspectors and the inspected. This approach helps provide evidence that the inspector visited the premises at the date and time originally scheduled and/or reported on the time sheet; that the inspections were of the desired quality; and that violations were not deliberately “overlooked” in exchange for personal gain.
The Inspection Bank
A city’s auditors observed that an inspection agency’s supervisors spent no time in the field. So long as the inspectors met their monthly inspection “quotas,” the supervisors were satisfied with the agency’s productivity. But the managers could not satisfy the auditors when the auditors asked how the “quotas” were established. So the auditors visited a sampling of the inspected facilities, asked the building superintendents when they had seen the inspectors, and compared those dates with the dates reported on the inspectors’ time sheets. However, the auditors were unable to reconcile a large number of the dates. On many occasions, the inspectors’ time sheets showed dates later than the dates the building superintendents told the auditors the inspectors had been at the facilities. After further inquiry, the auditors discovered what was happening. The inspection “quotas” were based on a low level of productivity, enabling the inspectors to complete their “quotas” early in the week, take unauthorized time off later in the week, and report their activities as if they had worked a full week. Weak supervision and poor productivity standards enabled the inspectors to “bank” their inspections, for reporting later in the week!
d. Managing and Monitoring for Performance and Productivity
- Managing for results requires the manager to establish performance objectives (in terms of both program results and staff productivity), develop indicators to measure performance, prepare an annual work plan, schedule specific inspections, monitor performance against the objectives, and act when performance lags behind the specific objectives established for the year.
- Inspection programs require two kinds of performance indicators, those that measure achievement of the basic goals of the inspection program (outcomes measures) and those that measure staff productivity (outputs measures). A productive inspection staff is obviously important, but both the manager and the performance auditor need to remember that inspection is simply a means to achieving a goal – the deterrence of specific hazards and risks leading to improved public health, safety, and welfare. Hence, the manager must develop a means for measuring the results achieved by the inspection program.
- Here are some examples of outcomes measures that might be established for specific inspection programs:
|Inspection Program||Goal||Performance Indicator|
|Elevators||Fewer accidents||Number of elevator accidents|
|Restaurants||Improve cleanliness||Number of consumer complaints on cleanliness|
|Food processors||Reduce food-borne illness||Number of food-borne illness outbreaks|
|Gasoline pumps||Reduce consumer fraud||Ratio of misrepresented pumps detected to total number of gasoline pumps inspected|
- You might argue against the use of outcomes measures such as those set forth above on the basis that there is not necessarily a direct cause and effect relationship between the inspection program and the performance indicator. On the other hand, you can also argue that the inspection program was established to help achieve the specific goals enumerated and it is highly likely that the inspection program contributed at least partly to the results. You can also argue that, if the intended results are not being achieved, new strategies need to be developed to cope with the problems. As discussed in the chapter on performance measurement, measuring program outcomes generally requires more than one performance indicator; also, managers should establish indicators that best measure the goals intended to be achieved by the program.
- Program managers should establish specific goals at the beginning of the year, track performance during the year, and seek to explain and act on deviations from the goals. Hence, if the objective of a food processor inspection program is to reduce by 20% the number of persons affected by food-borne illnesses, the manager will want to track the number of incidents of food-borne illnesses throughout the year. The manager will also want to determine whether illness incidents might be related to breakdowns in the inspection system and whether inspection and other strategies need to be changed as a result of a failure to achieve targeted results.
- In addition to managing for outcomes, the good manager is concerned with the performance of the inspection staff, both qualitatively and quantitatively. We have previously discussed the importance of training and supervision in achieving this goal. But the manager also needs to keep an eye on the bigger picture. This means that an annual work plan needs to be prepared detailing the number and types of inspections to be made. Procedures for detailed scheduling of inspections need to be in place to assure that premises are available for inspection at the time scheduled, to keep travel time to a minimum, and to assure adequate rotation of inspection assignments.
- The agency needs to maintain productivity records by individual inspector, inspection unit, regional office, and the agency as a whole. Comparisons of performance at each level might indicate a need for counseling (or other action) of individual inspectors, unit supervisors or regional supervisors. Managers need to monitor performance through regular reports and act on deviations from planned goals. Here are some potential performance indicators for this aspect of the inspection program:
Number of inspections; also, number of inspections per inspector day
Number of inspections revealing either no violations or insignificant violations
Number of inspections resulting in fines; also, dollar amount of fines levied
Number of violations issued
Number of inspections revealing significant violations, so as to require re-inspection Number of consumer complaints
- Record-keeping is a vital part of the inspection activity. An effective automated record-keeping system (for example, use of notebook computers by inspectors) will improve inspector productivity by reducing the paperwork and time spent in the office. It will also strengthen the inspection scheduling process (including re-scheduling as a result of deficiencies found on inspection), and greatly improve management’s capabilities for analyzing inspection results and devising better inspection strategies.
e. Following Up on Inspection Results
- Making inspections is one important element of a regulatory inspection program. Following up on the results of inspection through fines and re-inspection (where those actions are warranted) is equally important if the underlying goals of inspection are to be achieved. Many inspection agencies also use publicity as an enforcement mechanism.
- Managers need to take aggressive and meaningful action if an inspection program is to effective. This means that they need to:
— send out notices of violation promptly;
— levy fines and penalties in amounts commensurate with the nature of the violation (that is, the violator must view fines and penalties as more than just another cost of doing business);
— increase the nature and amount of penalty for repeated offenders or failure to correct violations;
— ensure that fines levied are collected promptly;
— use publicity where appropriate.
- These are some performance indicators applicable to this aspect of the program
— Percentage of fines levied that were collected during the year
— Average number of days of fine levies in accounts receivable
— Average dollar amount of fine levied (initial offenders and repeat offenders, separately)
Auditing the Regulatory Inspection Program
a. Make a Preliminary Survey and Plan the Audit Approach
- As discussed in preceding chapters, the performance auditor needs to “understand the business” before taking specific audit procedures. Thus, the auditor should gain an understanding of the matters discussed in the preceding pages – the objectives of the inspection program, the risks to effective performance of the program, and the strategies and control mechanisms established by management to accomplish the program. Making a preliminary assessment of the control system and the nature of management’s monitoring process will help the auditor assess the particular areas on which the auditor should concentrate audit resources.
- Analysis of the nature of inspection programs, as discussed in the preceding pages, should indicate that this type of activity lends itself to field observation and to analysis of internal records. Field observation is particularly important where the preliminary survey indicates weaknesses in supervision. Analysis of internal records will help to show whether management has been effective in monitoring performance. These are the specific audit steps that might be taken, depending on the auditor’s preliminary assessment of the control and monitoring systems.
b. Assess Long-Term Inspection Planning
- Review and assess management’s procedures designed to keep the inspection census current. Determine if the agency has been innovative in using available sources of potential data, such as data in the files of other government agencies, to maintain the inspection census.
- Where inspection frequency is mandated by law, determine whether the agency is complying with the law or whether backlogs are developing. Based on your overall assessment of program goal accomplishment and the efficiency and effectiveness of the inspection program, consider in conjunction with agency management whether the intent of the law can be achieved with a different inspection frequency than that currently required.
- Where inspection frequency is determined administratively, evaluate management’s basis for establishing and maintaining the inspection schedule. Consider such factors as: success in achieving program goals based on the existing inspection schedule; the adequacy of follow-up on establishments with inspection deficiencies; and timeliness of follow-up on accident/incident reports and consumer complaints.
- Evaluate management’s responses to (a) pressures to reduce costs and (b) pressures caused by inspection backlogs based on administratively-determined inspection schedules. For example, consider whether management has made effective use of risk-assessment analysis by adjusting inspection frequency and intensity based on the achievement of program goals. Have different inspection frequencies and intensities been established for different types of facilities where warranted by experience?
- Determine and evaluate how inspection standards (regarding both the nature of the inspections and the time needed for various kinds of inspections) have been established. For example, did management consider inspection standards established by industry or by other governmental jurisdictions? Are standards revised in response to changing conditions, inspection experience and reported negative events? Are region-by-region comparisons of inspector productivity considered in reviewing inspection standards? Are there procedures for considering employee suggestions regarding the nature of inspections?
c. Assess Short-Term Inspection Scheduling and Administrative Procedures
- Review the annual work plan and examine inspection performance in relation to the work plan. Did the work plan allow for unplanned reinspections and special inspections based on consumer complaints? How did management react to the development of backlogs, if any, in the work plan? Was staffing adjusted, where warranted, or was the plan adjusted to ensure inspection of locations where risks associated with non-inspection were greater? What actions were taken regarding apparent shortfalls in performance by individual inspectors or units?
- Review reports regarding the quantity and nature of deficiencies disclosed by inspection and assess the timeliness and effectiveness of management’s responses to those deficiencies.
- Examine practices regarding the scheduling of individual inspections, the attempts made to keep travel time to a minimum, and the attempts made to reduce the time spent by inspectors in administrative chores both in the office and in the field. Are inspections scheduled in such a way as to keep travel time and office time to a minimum? Is computer technology used to reduce inspector paperwork, to aid in record-keeping regarding the facilities under inspection, and in the analysis of the results of inspection?
d. Assess Inspector Performance and Supervision
- Review and assess personnel practices regarding the inspectors. How are pay scales established? What are the promotion policies and procedures? What are the training policies and procedures? What attempts are made to professionalize the inspection program through, for example, employee suggestion programs and periodic “best practices” sessions? What is the rate of employee turnover, including the rate of promotion to other positions within the agency? Are there procedures to determine why employees leave?
- What are the policies, procedures and practices regarding employee supervision? Do supervisors periodically field-check the quality of inspections as well as employee attendance through procedures such as those described in the section on “Understanding the Control System and Operating Strategies.” What are the results of those field-checks? Evaluate whether supervision is sufficient to assure both the quality and quantity of inspection effort.
- Learn the inspection procedure and arrange to accompany inspectors (both with and without their supervisors) on a series of field-checks several times during the audit. Also, make field-checks of inspections reported as having been recently completed. Trace the results of the inspections made on your field-checks to the results reported by the inspectors in their activity reports. (The extent to which this step is needed will depend on your overall evaluation of agency management and employee supervision procedures. In many audits, this step has been very valuable in helping the auditor to evaluate productivity.)
- Trace a sample of inspector activity reports to the records regarding individual facilities to see if the records are accurate and up-to-date. Make sure your sample includes instances where the inspections resulted in serious violations requiring reinspection or fines.
Goof-offs Goof off – Even in the Presence of Auditors
You would think that the presence of an auditor would cause an inspector to put in a full day’s work, right? Not if the inspectors are accustomed to goofing off. Auditors in one state decided to accompany an agency’s inspectors on their daily rounds. The normal workday was 8:30 a.m. to 4:30 p.m. To the amazement of the auditor, an inspector said: “I’ll meet you tomorrow at 10 a.m.” When asked why so late, the inspector replied: “That’s when I want to start.” At 2:30 p.m., the inspector stopped working and told the auditor. “I’ve done enough for today.” The auditor later found that the inspector had reported in his time sheet that he had worked a full day. Unfortunately, this was not an isolated incident.
e. Assess the Inspection Follow-Up Actions
- Review the actions taken by management to correct deficiencies disclosed by the inspection process. For example, did management notify facility owners timely of deficiencies disclosed by inspection? Did facility owners correct deficiencies promptly? Were re-inspections made, where warranted?
- Review the policies and practices regarding fines and penalties and determine if they are used as an effective enforcement tool. Do the amounts of the fines appear to be reasonably related to the nature of the deficiencies? Are repeat offenders fined a greater amount than first offenders? Are fines collected promptly? What actions are taken where fines are not paid promptly? Is there evidence of unwarranted compromise by the agency regarding the amount of fines originally levied? Is publicity used as an enforcement tool?
f. Assess Program Accomplishment
- Ascertain whether management has a system (including internal and external reporting) to assess its accomplishment of basic program goals, and evaluate that system. If such a system does not exist, discuss with management the criteria that might be used in making an assessment. (But note that the auditor needs to be satisfied that the assessment criteria are relevant and reasonable.) You might, for example, examine trends in numbers of accidents in the case of an elevator inspection program intended to ensure elevator safety; trends in numbers of consumer complaints in the case of a restaurant inspection program intended to ensure restaurant cleanliness; or trends in food-borne illnesses in the case of food establishment sanitary conditions.
- Review the nature of the reported negative events and the timeliness and effectiveness of the agency’s responses to those events. Try to determine if negative events are related to weaknesses in inspection and other enforcement procedures. For example, did negative events occur despite recent inspections at a particular facility? Do inspection and other enforcement actions seem to have an impact on the negative events? Do persisting problems indicate evidence of lax enforcement?
- Review and evaluate the system used by management to monitor the productivity of the inspection staff and the progress made by the staff in achieving the number of inspections planned for the year. Is productivity monitored based on periodic performance measurement reports showing actual numbers of inspections against planned numbers? Are reasonable actions taken in response to growing inspection backlogs? Are productivity comparisons made among inspection units and inspection regions, and are causes for differences analyzed?
- Based on the foregoing steps and the reports and other material in legislative/executive files regarding establishment of the regulatory inspection program, assess whether the program is achieving its intended goals, and achieving them in an efficient manner.