oversight

Issues Facing Financial Managers in the Seventies

Published by the Government Accountability Office on 1971-03-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                                                                                                 094435



                                                                                  ADDiWSS BY



                                                                               ELWR B. STAATS

                                                                                  BEFORF !lXE


                                                                               MARCH 11, 1971




                                            @l   remzrks today might well 'be described as pmblems for t h e Seventies

                                     l e f t over from t h e - S i x t i e s as well as t h e problems emerging f o r t h e Seventies.

                                     As f i n a n c i a l managers, we f i n d ourselves i n t k e p o s i t i a n of t h e Members of
                                     Congress who have been advised by ?resident Nixon t h a t they have a long

                                     l i s t of unfinished l e g i s l a t i o n carried over f r o a t h e g l s t Congress t h a t

                                     must be acted upon i n t h e 92nd Cocgress.
                                            Furthermore, the l e g i s l a t i v e and national policy problems t h a t are

                                     going t o be acted q o n by t h e 92nd Congress and %is s1-zccessor Congresses

                                     &wing t h e Seventies w i l l i n turn create new and challenging problems t o

                                     be solved by t h e f i n a n c i a l mancgers i n the Seventies.             There i s a real

                                     p o s s i b i l i t y , i f not t h e certain*$,    that macy nev program will'be created
                                     requiring tremendous f i n a n c i a l mamgement attentioll.                There i s a l s o t h e

                                     likelihood of c e r t a i n major reorganizations within t h e Federal Goverment

                                     t h a t w i l l create acute problems f o r fin^ancial rnznagers.               A s many of you

                                     know from your experiences, the budgetkg, accounting, and re,oorting prob-
       ,'( OrL'
                                     l e m s are usually c o q l e x when ageccies sxe merged i.Tith other agencies, o r
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    parts of agencies are merged with other agencies.                    The Seventies are l i k e l y

    t o confront many of you with t h e financid. and personnel problems t h a t oc-

    cur vhen reorganizations w e implemented.
          In few periods of our         national history have government i n t h i s country

    &--all    levels-beer,       under such serious challenge as t o vhether they citn

    be made responsive and responsible f o r dealing with t h e Nation's problems.

    The s i t u a t i o n i s underscored by t h e well-knom fact t h a t the President has

    submitted a budget t o t h e Congress for f i s c a l year 1972 with estimated out-
    lays of $229 b i l l i o n   - about $17 b i l l i o n above'his     estimate f o r f i s c a l year

    1971- The climate of pressure for more and more Fe&eral spending places
    a herculean responsibility on government's f i n a n c i a l managers.
          Does t h e F e d e r d f i n a n c i a l manager do h i s job well i n r e p o r t h g t o t h e

    public and the Congress on these expanding Federal f i n a n c i a l a c t i v i t i e s ?

          Is he infoming t h e American taxpwer as t o what he i s getting f o r
    h i s tax dollar?

          C a n t h e taxpayer make a reasonably accurate judgnent of what t h e

    Federal Government i s doing and what it gets from i t s vast expenditures?

          Does t h e f i n a n c i a l manager p e r f o m as he should i n pointing out where

    Federal spending could be c u r t a i l e d i n areas of lowest benefit return,

    and does he suggest opportunities f o r shifts i n spending to areas of high-
                      -
    est benefit return Tor the d o l l m s spent? Are t h e supporting data for the

    budget well developed, r e a l l s t i c , and properly j u s t i f i e d , so as t o provide

    maximum assistance t o t h e Congress i n its consideration of appropriations?

          These- questions challenge t h e Federal f i n a n c i a l manager, regardless

    of t'ne specialty role he may have.             The s t a t e d and accepted objectives of




                                                                                                - 2-
 t h e Seventies should be t o f i n d solutions t o t h e fundamental problem t h a t

,@&uareu       &onfront         of us i n f i n a n c i a l planning and budgeting, in

 accounting and resorting, in i n t e r n a l and contract auditing, and h staff

 trainzng and development.

      We have come through a p e r i o i when t h e spending at various l e v e l s of
 Government has increased i n mounts not experienced previously i n t h e nearly

 200 y e a s of United S t a t e s history.    This acceleration has s h i f t e 2 a. sub-

 stantial proportion of "personal choice" spending t o "Government choice"

 spending, a l b e i t Government spending presumably i s done with t h e t a c i t

 acceptance cf a majority of voters.           The accelerated spending is, however,

 begianing to receive e f f e c t i v e protest, witness t h e many bond issues at

 l o c a l 1evels.which have been rejected by t h e voters.          There are signs t h a t

 the rate of acceleration w i l l decline .and t h a t t h e public expects evidence

 of b e t t e r r e s u l t s from t h e large sums being collected and spent,

      F i n a m i a l problems l e f t over i n variou:: stages from t h e S i x t i e s o r

 just emerging i n t h e Seventies may-be i d e n t i f i e d as follows:

       1. Implementation and maintenance of adequate planning, program-
            ming, and budgeting systems at various l e v e l s i n each agency.

       2.   Development znd use of productivitx and work standards and

            measurements   .
       3.   Development m d use of accrual accounting i n harmony with

            productivity and work measurement systems.

       4.   Expansion i n t h e use i n electronic data processing systens.




                                                                                       - 3 -
         5.   Recognition of t h e trend toward regionali-zation and decen-

              t r a l i z a t i o n of agency a c t i v i t i e s .

         6.   Improvements Z n t h e f i n a n c i a l management of t h e complex znd

              evergrowing Federal, State, and l o c a l programs.

         7.   Inrprovements i n t h e quality and quantity of audit work a t

              Federal, State, and l o c a l l e v e l s of' government, and increased

              coordination of audit work between and among those levels.

         8. Development          of uniform cost standards and application t o

              defense contracting.

P l m i n g , Programing, and Budgeting Systems

         In July 1969, (30reported on t h e progress made by executive agencies
i n implementing t h e PPI3 system.                  In b r i e f , what we found was t h a t there

were considerable differences among t h e progrm c l a s s i f i c a t i o n frameworks

used by t h e agencies.             dnly a few agencies had written p o l i c i e s t o guide
analysts i n t h e preparation of required PPB docwaents.                            Cornmication

between accounting -staffs and t h e PPB analytical staffs was laeking.

         Since then agencies appezr t o have done l i t t l e t o develop or f u r t h e r

hprove t h e systems and c l a s s i f i c a t i o n aspects of PPB.

         Perhaps one reason for t h e slowdown i s the "top-to-b.ottora" approach

t h a t was o r i g i n d l y used f o r PPB.           A consultant t o t h e Office of Management

and Budget (OHB) recenkly has concluded t h a t existing programing and bud-
geting systems do not support uniformly t h e way i n which l i n e managers

actually make program and resource decisions nor t h e iray i n which they

subsequently manage approved program.                           A s a r e s u l t of t h i s finding t h e
     ~




consultants and the 033 undertook a p i l o t e f f o r t t o t e s t zipproaches for




                                                                                                     - 4-
aligning planning, programming, and budgeting systems t o t h e needs of man-

agement,      The s t u w group concluded t h a t a "bottom-to-to?"                approach i s

essentZa2. if PPB i s to conform t o t h e information needs of agency l i n e man-

agement.
      If it shauld be decided t h a t t h e "bottom-to-tDp" approach to PPB is
appropriate f o r all .zgencies, Z i n m c i a l managers will be heavily involved

in bringbg this a b m t .          It will be necessary to:

      -- iderrtify ageacy goals and objectives;
      =-    deueIcq a camon goal-oriented framework for i n t e g r a t i n g                  .

            all agency mmagement e f f o r t s ;
       --
      -- i n t e g r a t e Zntemal management systems f o r plauling, budget-
            ing, progress reporting, and accounting;

      =-    ensure t h a t Zndividual needs and perspectives at each

            echelon o f management a r e taken i n t o account.

     Whether o r n o t t h e s p e c i f i c recommendations of the 02~Bconsultants
are accepted by t h e executive branch, f i n z x i a l managers must face up to

t h e need f o r signifZcant impovements i n PPB systems.

Andmes

      E q u a l f y important is t h e v i a b i l i t y of t h e agency a n a l y t i c a l work.

      The q u a l i t y a&   t h e quantity of agency a n a l y t i c a l work i s going t o be

challenged more i n t h e fitu_re than it has been i n t h e past.

      The Legislative Reorganization Act of 1970 i s a c l e a expression of

congressZona1 i n t e r e s t i n benefit-cost t i n e s o f analyses.             In t h i s Act
t h e GAO is encouragA t o make benefit-cost studies e i t h e r on i t s own

i n i t i a t z v e or i n response t o congressional requests.             Other recently


              *


                                                                                               - 5-
proposed l e g i s l a t i o n also emphasked t h e evaluation of t h e r e s u l t s of
agency programs a.nd the need for GAO t o forge ahead i n t h i s area.

      The decade of the 70's v i l l see a major trend toward t h e inclusion

of mandates ' i n l e g i s l a t i o n t h a t evaluation of 'programsbe an i n t e g r a l p a t
in the managezllent of on-going program.              Emphasis s r i l l be given t o t h e

degree of adherence t o objectives.            Evaluation a c t i v i t y w i l l require t h e

close participation and contributions of f i n a n c i a l managers.              They will

be called upon t o provide m c h of t h e data upon which good analysis depends.

Eva3uation of Productivity i n t h e Federal Sector

      The recent increases i n Federal. salary scales and t h e provision i n

lax for annual review and possible annual upward adjustment i n such salary
r a t e s places i n c r e a s h g importance on t h e subject of the numbers and pro-

ductivity of Federal employees.

      The latest overall'revision of t n e Office of Ymagement and Budget

Circular   A-44 was issued i n February 1970. This c i r c u l a r provides f o r
agencies t o establish management hprovement programs, h c l u d i n g provi-

sions for identipYing quantitative measures of performance, establishing

performance goals, analyzing results, a i d i n i t i a t i n g corrective action,
                  -
0-XB C i r c u l a r A-11 provides f o r t h e use of work measurement, u n i t costs,

and productivity indexes t o t h e maximum practicable extent i n j u s t i f y i n g

staffing requirements for measurable workload i n agency budget requests.

      Some agencies of t h e Federal Government have done work i n selected

areas to measure p r b d m t i v i t y of e q l o y e e s , but t h i s measurement data

i s not applied i n Govement generallj.               On the ot'ner hartd, the agencies

of t h e Federal Govement have done extensive work t o Liiprovz methods,
                                                        -.-.
                                                          .




                                                                                          - 6 -
     t o eliminate unnecessary work, t o place c e r t a i n f'unctions on machines, t o

     reorganize groups, e t c .

            Many agencies have been slow i n applying productivity and work measure-

     ment methods to t h e h operations on t h e grounds t h a t t h e i r operations do
     not lend themselves t o measurement methods or t h a t t h e i r operations are




r-   t i v e s from t h e Office of Management and Budget and t h e U.S.              Civil Service
.,   Conmission t o assemble data on t h e current Federal e f f o r t s i n t h i s area

     and t o provide LqeeUs for more attention t o t h e matter of improvement
     of ernployee produ&Zvity.

            Some a c t i v i t i e s , of the Federal Governrnent a r e of a chmacter where
     productivity, vork masu_rernents, and u n i t costs can be determined with

     r e l a t i v e ease.   Other e c t i v i t i e s require a more sophisticated o r subjective

     approach t o t h e i r evaluation.

            We belfeve t h z t many new weas w i l l be found where output measurements

     can be integrated &%h           f i n a n c i a l data.   We are convinced t h i s w i l l provide

     much information of value t o managers i n controlling day-to-day, month-to-

     month, and Jrear-to-yeas costs.               These studies will serve a cost reduction

     objective aqd suppox% more c l e a r l y and l o g i c a l l y t h e budget presentations

     t o t h e Congress.

            Concerted a t t e n t i o n t o studies and implementation of productivity

     evaluations and perfo-mace measurements i n all areas of Federal agency

     nanzgement, must be develoged i n the 70's.



                                                                                               - 7 -
Developmat and u s e s of accrual aceomtine

      As ym know, %he -requirements f o r accrual accounting i n t h e i n t e r n a l

managemmt af a g e n d e s a r e found i n t h e budget and accounting acts of 1950
ahd 1956- These requirements were given significant additional support

by the recammendatkms of the President's Commission on Budget Concepts                         )i?,$

in 1$T*

      As a e ihvestigator for a congressional committee recently asked, "Why
a f t e r 25 a r m o r e years have agencies been reluctant to accept t h e accrual            -

basis af aecaunting?'.        One quick answer, which is really no .answer kt all,

i s t h a t agencymanagement j u s t doesn't understand t h e accrual basis.

      Cuatrary t o t M s view, we f i n d that most agency managers understand

the accrual. p r i n c i p l e even though perhaps not under t h a t label.     It i s t h e
rwe manager; inde&& t h a t does not understand a system by which revenues
are recogxized as e m e d and costs recognized i n terms o f resources con-

sumed.    Yes, there may be differences of opinion as t o when and how much

is earned an6 when           how much 9s consums6, but the basic principle has

a greater understmdZng among managers than many might assume.
      W e are i n c l i n e d t o conclude t h a t agency managers ase reluctant t o
                                                                                                   I

support a316 use the accrual b a s i s of accounting i n many instances not

because they differ with t h e concept but because they are not convinced

that the q u a l i t y of t h e decision-making processes are necessarily improved

by t h e u s e of f i n a n c i a l data produced on t h e accrual basis.   In other words,

the chd3enge i s i n terms of t h e r e a l effectiveness and potentials of t h e

accrual basis and its costs/benefits r a t h e r than i n terms of a lack of

understailing of the concept.
            Herein l i e t h e relationships of t h e development o f - t h e -accrual b a s i s
    and t h e development and use of productivity and work standards and measure-

    ment,     These measurexent systems which should be developed in close coordi-

    nation with t h e accounting managers t o produce account c l a s s i f i c a t i o n s and

    f i n a n c i a l data which w i l l produce useful and credible u n i t cost data t o

    serve management, budgeting and planning needs.               We know t h a t obligation

    and cash data by t h e i r very nature do not produce acceptzble data which

    may be synchronized and integrated with t h e productivity and other perfor-

    mance measurement data.         They j u s t cannot be properly synchronized.          They

    are on difI'erent wave-lengths.

        .   Our experiences would suggest t h a t agencies which have r e a l i s t i c pro-
1


    ductivity and work standards and measurement systems underlying t h e i r bud-

    getary processes f i n d Yne accrual p r h c i p l e e s s e n t i a l t o t h e proper evalua-

    t i o n of budget and management r e s u l t s .   The accrual b a s i s flourishes when

    i n t e r n a l budget and program plans are based on performance over given time

    spas.

            Program and budget management d i c t a t e s t h e uses of accounting f o r

    management purposes.         Unless and u n t i l t h e art of both program arld budget
                                                                                                      -
    management becomes more apt and b e t t e r developed i n many agencies, t h e

    uses of accounting data measured on t h e accrual basis frankly w i l l con-

    tinue t o lack general acceptance.

            The accrual b a s i s of accounting w i l l never be used as a generally

    accepted management t o o l sinply because those s k i l l e d i n f i n a n c i a l manage-

    ment say t h a t it i s good.      We need much more effective j o i n t participation

    in.t h e e n t i r e management infomation systems complex by all functional




                                                                                          - 9 -
                                         ,
                         0
groups-    program planners      , operating mmagers,         budgeteers , a d accountants

The developmmt of productivity and work measurernent systems a t t h e same
time as those i n accrual accounting w i l l do much t o demonstrate by actual

agency experzences t h a t t h e q u a l i t y of management decision-making can be

appreciably &.tprovea%y t h e i r association i n usage.

Automatic Data Processing

      The increasing need f o r information by managers of t h e Federal Govern-

ment resulted, as we a l l know, i n increased automation of data processing
systems.     Unfcz-hnately, at t h e end of t h e 60% t h e r e was s t i l l much un-

finished work i n deszgning e f f i c i e n t information systems..           A comon fault

i n t h i s development bas been inadequate mana,gement,
      Many systems were simply allowed to evolve over t h e years with no

p a r t i c u l a r objective o t h e r than t o avtomate e x i s t i o g procedures.   Others

were developed primarily to computer s p e c i a l i s t s within a general framework

of information reqrri;kements established by management,                   Serious operating

problems &d        loss of maqagenent control has resulted.              There i s no question

t h a t costs are excessively high and t h a t strong action i s needed t o re-

e s t a b l i s h t h e control functions lost in the rush t o automzte.

      A r e l a t e d problem has been t h e inadequacy of documentation of informa-

t i o n systems.    ADP technicians have tended S;c lack t h e discipline of f u l l y

docmenting t h e i r work.       lnadequate systems documentations has become a

management problem because :

      -- changes and corrections are extremely d i f f i c u l t t o make,
      -- interagency sharing of systems documentation i s not possible,
      -- a u d i t a b i l i t y of the systems i s seriously impaired, and
      -- t r a i n i n g of new personnel i s more c6rtly and t i m e consming.

                                                                                        - 10 -
                                                                                                      .   -
      The forecast of continued tec’hnological advances i n t h e Seventies

p a i n t s a rosy p i c t u r e f o r improvements i n information processing.          We w i l l

be wise, however, i f we view t h i s p i c t u r e i n t h e l i g h t of our expesience

of t h e Sixties.         Improvements must not come from f a s t e r computer cycle

times and more sophisticated program language repertoires alone.                        They

must also come through changes of a q u a l i t a t i v e nature i n systems design.
       One ingredient for improved information systems which has been missing

is total comunication.            To achieve t h i s , t h r e e s p e c i f i c areas must be

emphasized.

      1. Satisfaction of user requirements.                 I n order t o exploit technology

a d properly u t i l i z e i t s potential, we must consider information systems

from t h e vieviyoint of t h e i r t o t a l i t y and usefulness t o management r a t h e r

than as disjointed h c t i o n a l operations.
                     I
      2.    Greater standardization of procedures, equipment, software, and

d a t a elements.        The increasing interrelationships developing mong the

data systems of Federal, State, and local Governments and betveen such

systems and those of industry add emphasis and dimension t o t h e need f o r

standardhz at ion.
      3.    Improved man/machine comunication.               To increase t h e u t i l i t y of

the computer, we mst direct; our technological. e f f o r t s t o improving t h e
conversztional mode of communication and removing t h e b a r r i e r of lmguage

which now e x i s t s .

      Achieving t‘ne above g o a l s trill be necessary before we t r i l l be able to

r e a l i z e t h e b e n e f i t s expected from T i t l e I1 of t h e Legislative Reorganiza-

tion Act of 1970. A s I have said, t h i s Act c a l l s upon various resources
                                              ..



                                                                                         - 11     ”
                                           0
           of both t h e executzve a d l e g i s l a t i v e branches f o r g r e a t e r input t o the                .

           information g a t h e r k g and evaluating processes.                 O f primary concern to all

           Federal financial managers a r e t h e new requirements f o r budgeting and fis-

           cal information,               TZtle I1 of t h e Act requires t h e Secretary of t h e Treasury

           and t h e Director o f t h e Office of Management and Budget, i n cooperation with

           t h e ComptroIler Generd, t o develop, establish, and maintain a standardized

           information and da%apracessing system, f o r budgetary and f i s c a l data.                         It
           requires also t h e development of standmd c l a s s i f i c a t i o n s of programs,
           activities, receipts, and e q e n d i t u r e s +,
                     The definition, design, and implementation of such a Government-wide

           information systera will take an extended period of t i m e .                    It w i l l be costly,
           and it w i l l r e q u i r e a firm and contiimed commitment t o i t s objectives.                     It
           Wiu. require t h e c q e r a t i o n of t h e e n t i r e Federal f i n a n c i a l management

           community.           The Act 2s c l e a t h a t t h e proposed system must meet t h e needs

           of all branches of Government.                  The i n i t i a l s t e p w i l l have t o be a systematic

           determination of these needs.                  These developments undoubtedly w i l l , have           XI


           impact upon t h e i n f a m a t i o n systems of &Ll agencies of t h e Executive branch.

           Avency De centraldz a"ton

                     As you knok, m e of t h e President's goals i s t o s h i r t operating respon-
           s i b i l i t i e s f o r F e d e m l programs from Washington t o S t a t e s and l o c & i t i e s   -
           nea.rer t o t h e people served.              This has often been c a l l e d !'regionalizatioc"
                                                                                                                                     _ ,




                                               .
                                                                 A

           or       dec e n t r a l i z at ion"*                                                                                           i
                "                                                                                           -     .
                                                                                                                       .
                     In t h e Department of Defense t h e r e i s a measure of t h e same idea i n

           t h e program of " p a r t k i p a t o r y management"     .. This decentralizes management
           T.rithin t h e Department,              Its program of emphasizing t h e importame of decision-
           making at t h e System Proqam Office level for major weapons acquisitions i s

           one exmple.


                                                                                                        - 12 -             _._&..,    -
.   . ..
     '
          Perhaps t h e b e s t known step toward t h e goal of decentralization i s t h e

    establishment of t e n regional centers for which t h e p r i n c i p a l Federal agencies

    i n urban problems are required t o e s t a b l i s h uniform regional boundaries,

    However, the establishment of Yne regional centers i s only a s m a l l part of
                                                                                                       .   !
    t h e chaage that i s ta3sing place.
                                                                                                               - - 4
          Take the Depwhnent of Housing and Urban Development for an example,
    As one of t h e agencies required t o e s t a b l i s h a regional o f f i c e a t each of
    the- t e n regiooal centers, EUD created f o u r new regioaal offices and t h i s

    yeax it plans t o create 21 more,             The mea offices and t h e Federal Housing

    Administration insuring o f f i c e s w i l l be respms'ibie for operating Wd

    decision-making functions and w i l l be HCJD's p r i n c i p a l point of contact f o r

    program participants,            The regional offices w i l l supervise and evaluate

    area and insuring o f f i c e operations.. The Washington o f f i c e w i l l estab-
b   l i s h policy, define p r i o r i t i e s , set c r i t e r i a and standards, promulgate

    standards, and oversee f i e l d operations.

          At t h i s time one can only speculate as t o t h e number of departments
    which eventually w i l l decentralize t h e i r operations.           It i s c l e a r , however
    that f i n a n c i a l managers i n agencies t h a t do decentralize w i l l face a r e a l

    challenge i n t h e 7 0 ' s :

          -- Accounting,
                                              1


                              budgeting, and management infomation systems must

              be developed or revised t o przvide t h e needs of f i e l d managers,

          -- Inputs t o t h e accounting,         budgeting, and management information

              systems w i l l be generated a t t h e f i e l d offices.

          -- Headquarters'          offices w i l l require information from t h e f i e l d

              o f f i c e s and t h e r e w i l l be the greater requirement t h a t such




                                                                                          - 13 -
                                                                  .   .




               information be both timely a i d accurate.                 This seems t o f o r e t e l l

               g r e a t e r numbers of "on-line" computer systems which w i l l r e s u l t

               In a marked departure from conven-tionai data transmission tech-

               niques *

            -- Effective monitoring systems w i l l have t o be developed.                   -Possible

               shifts i n the organizational alignments of i n t e r n a l audit organ-
               i z a t i o n s might be anticipated.   As d a t a transmission techniques
               change t o become responsive t o "on-line" systems, auditors will

               need t o take a good hard look at t h e i r processes and give considera-

               tion    tlj   such techniques as using live d a t a from input t o output i n

               the actual t e s t i n g of transactions.

    .Improver;zent i n h
                   s
                   l                       i              t

            Federal Assistance. Review PrCgram

            A t present t h e r e are over 1,000 Federal assistance program involving

    every State. 8qC many thousands of other po1i';ical subdivisions.                         The pro-

    gram has grown t e n f o l d i n t h e past two d.ecades t o an estimated $27.6

    b i l l i o n in FY 1971.     Over ninety percent of these f'unds are administered

    by six Federal agencies.

            These programs finkace a wide v a r i e t y of grants, loans, t e c h n i c d
                                                              v




    assistance, and services ranging-from a few d o l l a r s t o several million

~   dollars.     t h y program are narrowly defined and are r i g i d l y controlled;

    others are coaprehensive i n scope and can finance a vaziety o f a c t i v i t i e s .

    Each has i t s own Federal. guidelines, p o l i c i e s , p r i o r i t i e s , administrative

    requirements, f i s c a l regulations, and volu?lrinous documentation and report-

    i n g systems.
        7
     &my programs overlap and duplicate each other.            It i s not unusual f o r
a given project desired by a comunity t o be e l i g i b l e for f'unding under
any oae of five t o t e n programs.      It has taken f i v e years t o produce a
reasonably accurate hventory and description of the maze of Federal

grant programs.
      On Y i c h 27, LSg, t h e President directed the Budget Bureau (now the
Office of Maaagement and Budget) and all ten Urban Affairs Council agencies               ~




t o .mobilize   it   three-year interagency program t o cut red tape and strem-
l i n e the delivery of Federal assistance.

     Under Office of Management a d Budget chairmanship, top l e v e l agency

representatives prepared a work program calling f o r execution of the
                                                                 -            L

President's directive within three years. The FAR participating agencies

have 'developed i n t e r n a l improvenent programs covering t e n areas--

                       Common Regional Bourdaries
                       Regional Councils
                       Cwt%ing Red Tape
                       Reduction i n Wocessing Tixe
                       Greater Reliance on State and Local Government
                       Decentralization        '  9


                       Consistency of Procedures
                       Joint Funding Simplification
                       G r a n t Consolidation and Coordination
                       Implementat ion of Intergovernmental Cooperat ion
                            A c t of 1968

     The FAP, Irogranr also includes non-Federal participants as the U.S.

Conference of Wyors, International City Nmagement Association, National

Association of Counties, 3Tational League of Cities, Council of State Govern-

ments, and the National Governors Conference.          Under a contract with an

agent f o r these groups, the Office of Mmagement and Budget assigns projects
t o these organizations f o r such a c t i v i t i e s as analysis of S t a t e and i o c d

v i e q o i n t s w5th regqrd t o administration of specific p a a t grograins, vali-

dating the significance of grant improvements as they are made, and making
s p e c i a l a n a s e s of h c e n t i v e s , processes, and requirements o f t h e Federal

systen which tend to block or i n h i b i t t h e achievement of the grant +tn7his-

trative improvement obj e c t i v e s     .
       On December 18, 1970, t h e Office of lhagement and Budget urged t h e

FAR agencies of t h e Federal Governent t o concentrate on three of t h e

t e n defined meas:

      1. Greater r e u m c e on S t a t e and l o c a l governments i n the

            detailecf admLnistration of grant-in-aid programs.

       2.   Decentralization t o t h e Federal f i e l d o f f i c e of significant

            operational a c t i v i t i e s f o r which S t a t e and l o c d governments

            cannot-assme administrative responsibilities.

       3.   Interagency collaboration i n t'ne standardization of require-

            ments and procedures with respect t o grant programs.

       It is appazent t h a t as t h e Federal Assistance Review Frogram develops

its programs, all meas of f i n a n c i a l management a t t h e Federal l e v e l       --
plannhg, budgeting, accounting, reForting, data processing, and auditing                          --
w i l l contribute t o t h i s e f f o r t which brings all r e l a t e d Federal, State, and

l o c a l l e v e l s i n t o collaboration.

      The Effect of Changes i n Intergovernmental Relations
      Upon Developments in Agency Audit Functions

      The c u r r e n t ~ p r c q o s d sof t h e President f o r greater reliance on S t a t e

and local Govem-enks i n t h e , administration of p a t - i n - a i d programs




                                                                                      - 16 -
and f o r regionalization of many of t h e decision-making processes now reposed
at c e n t r a l Federal l e v e l s raises inmediately t h e question as t o how t h e i r

development and implementation may e f f e c t t h e performance of t h e audit

flmction.     The appropriate r o l e of Federal audits i n intergovernmental

relations and progrms comes irilmediately t o mind.
                                                                                                             .
      Some of the i s s u e s which w i l l face Federal managers and vhich impinge

upon t h e functions of audit a r e :

      1. The necessity f o r greater coordination of audit e f f o r t among
            the Federal agencies as well as between Federal, State o r

            local agencies.        This improved cooydingtion trill be ben,ef-ibial                      ,



            fron t h e v i e q o i n t of t h e p a n t e e and w i l l minimize duplication

            of audit e f f o r t

      2.    Grgater a t t e n t i o n will need t o be given by Federal audit person-
            n e l t o the estZ’olishment of standards of audit t o be observed

            by Federal and non-Federal auditors.                D- t h e i n t e r e s t s of economy,

            Federal auditors t r i l l need t o l e a r n how t o recognize t h e value of

            t h e tmrk of t h e non-Federal auditors when t h e non-Federal auditor
                  met
            has/these established performance standards.

      3.    Consideration of how t h e Administration’s plan f o r general

            revenue sharing wiU a f f e c t the agency audit organization.
                                                                                                     -


            Under present b i l l s , t h e audit as well as policing responsibil-

            i t i e s are placed i n t h e Secretary of t h e Treasury.             (Since b i l l s

            r e l a t i n g t o special revenue sharing have not been introduced,

            tfle proposed s h i f t s i n audit r e s p o n s i b i l i t i e s , i f any, are not

            knovm ).

                                                                                            - 17     =
Ikprovements i n the Quality and Quantity of
Federal Audit Progrms

      The   60% brought perceptible progress not only in t h e quantity but
in the quality and coordination of t h e audit work of t h e agencies of t h e
Government   .
      The improvements have been multi-dimensional.             Agency heads have gen-

eraZly come t o recognize to a greater extent than ever before the poten-

tials of a strong, independent, and objective audit am. In turn, auditors
have demonstrated by ma.ny case-examples that they have t h e a b i l i t y t o s e a &
beyond transactions and f i n a n c i a l accountability and e q a n d t h e i r horizons

into management audits, which i n t h e language of GAO, are concerned vitii
the management and u t i l i z a t i o n of resources   -- personnel,   equipaent, inven-

tories, etc;

      The level of professionalism of the audit function has significantly

increased.       Perhaps as much as any other functional. group i n government,

the auditor has seen t h e need f o r continuing education and career develop
ment by t r a i n i n g courses in the many facets of h i s a r ~ . Furt'ner, agency

audit groups have leaxned t o depend upon the m r k of audit t a l e n t of other

agencies and indepellCLent public accountants i n many Federal programs which

come under t h e i r purview.

      This i s not t o say there i s not room for f u r t h e r hprovement.       Every
good au6itor approaches an individual assignment with the view t h a t some

improvements a r e possible.      So it shoald be with t h e overall conduct of

the audit discipline.,

      There is much unplowed ground awaiting audit developrnents i n the 7 0 ' s .

The grovbh and corfrplexity of Federal programs produce problems which place
increasing demands q o n t h e auditor.            I n addition t o financial. and manage-
ment audits, the GAi3 has been concerned w i t h t h e development of the program

audit, t h a t is, aufi%s of program effectiveness or progrm results.                  This
is not to say t h a t -&e GAO intends t o abandon o r neglect financial and

mmagenent audits,           V e xre by no means s a t i s f i e d with t h e cutting of costs,
the increasing of revenues, and t h e improving of efficiency of operations.

We are d s o concern& with extending our evaluations to t h e accomplishments

o f t h e organization or t h e effectiveness of i t s operations in achieving

established o r p r e s c d b e d goals m d objectives 2 These evaluations have
assumed great signif3cance i n these dqrs when we have a national budget of

over $200 b f l l i o n   16a;'h   many competing claims f o r allocation of scarce f i n a m i d
resources t o import&              national programs and objectives.

      A prograk effed5veness audit can do much t o shed light on whether and

to what exbent govenrslent programs a r e accomplishing t h e purposes f o r which
they were azrthorized and vhether alternative approaches might n o t be more

effective at l e s s cos&.                                                                          -..

      From o m experiences i n conducting program audits l e t me c i t e an exmple

which indZcates the Eature and scope of such audits and the employment.of

concepts and t e c h i p w s of system analysis i n cost/effectiveness studies.

      Pollution of the Nation's waters has become a matter of major national

concern.     The F e d e r a Government i n t h e past 15 years has made p a - n t s of

nearly $2 b i l l i o n t u c i t i e s and other government en'tities t o help finance

the construction of &out 10,700 m s t e treatment plants costing $9 b i l l i o n .
A comprehensive GAO examination i n t o the effectiveness of t h e construction

grants program l e d to t h e following principal conclusions i n a report to
t h e Congress:
               D
4   - "




                1. The benefzts obtained from t h e construction of mmicip.aJ.
                     waste tre-zkaent f a c i l i t i e s were not as great as they could
                     W       e been because many of t h e f a c i l i t i e s were b u i l t on m t e m a y s
                     where ma;jm industrial and municipal p o l l u t e r s located nearby
                     continued t o discharge s u b s t a n t i a l quantities of untreated o r

                     inadequatdy t r e a t e d waste i n t o t h e waterways.

                2.   The constraction grant program was being administered mostly

                     on a t'shoe@.an'l      approach     -0   t h a t is, @ants were being amzded
                                      ~-             .
                                                     .
                                                     .


                     on a first-coae,          first-served or readiness-to-proceed basis.

                     LLMle consZderztioD was given t(; the immediate benefits t o

                     be obtain& by t h e construction of specific treatment plants.

                     In other wcwds, no systematic approach was being followed t o
                     decide >There applications of pu5lic funds would do t h e most

                     @ad i n enhancing t h e q u a l i t y of       OUT   Nation's rmters.

                The auditors recommended t h a t t h e Federal agencies d i r e c t l y concernei:

          require that t h e St&es,           i n establishing p r i o r i t i e s f o r the construction

          o f treatment facilZkZes, cor,sider t h e benefits t o be derived from con-

          struction in each case a d t h e actions %<<enor planned by other pollzters.
          They also r e c o m e n k d t h a t t h e Federal Water Quality Administration use

          sjsteln analysis t e a i q u e s i n planning f o r and.casrying our water pollution

          control programs.           h t h i s regard, GAO engaged an engineering firm during

          t h e audit t o assist .iill deiaonstrating t h e usefulness of s y s t e m analysis i n

          developing and 5tqLeznenting r i v e r basin pl.~nst o - construct water treatment

          facilities     .

                                                                                                    - 20-
                                                                                                     k.-..


                                                                                 ..'   i




-
Uniform Cost Accour&Zng Standards
      In August 1970, Public Law 91-379 was passed providing f o r t h e estab-

lishment of a CostrAccounting Standards Board.              The Board i s to promulgate 2 g!'

cost a c c o m k h g standards designed t o achieve uniformity and consistency
i n the cost aecowrf;kg principles follower3 by contrzctors m d e r Defens'e

contracts.     The standards are t o be used f o r estimating, accumulating,

and reporting c o s t s 5.n cannection with t h e pricing, administration, and

settlement o?? a l l negotiated Defense procurements i n excess o f $100,000,
                             I




331 February   I9'7rl, &e   5-man Bo8-rdlof   which I am chairmatwas sworn into

office.
               .
           An execut5ve secretary was select& just l a s t veek.
      Hopefully, c o s t accounting stmdards w i l l result i n improved understmd-

ing in the negotiakzon processes betxeen the Government and contractors f o r
t h e c o s t s i n c u r r e d b y t h e contractors i n t h e production of goods and the

furnishing of services on Defense contracts.              Establishment of standards
could result i n the narrowing of choices i n the use of cost accounting

practkes by G o v e m i n t contractors i n determining costs under Defense

contracts.     Cost accowting stzndard.s should r e s u l t i n a more consistent

application of c o s t p r i n c i p l e s by contractors i n t h e preparation of cost

and p r i c i n g data w b x i t t e d in support of p r i c e proposals and i n t h e account-

ing f o r contmct p&sormame costs.

      The 70ts shoulc=. see the consequences of t h e application of t h e cost

accounting s t m d a s d s i n t h e co;ltract decision-making and control a c t i v i t i e s

of Defense managernerxL,      A l l aspects of f i n a n c i a l mana.gement i n t h e procurement

area w i l l be affected by t h e i r application.      The planning and budgeting fluzc-

tions need -to consister the influences. of cost-accounting standards upon

t h e i r costing techniFes; contract auditors w i l l be furnished with mgre
1..




      n




          authorit skive guides t o t h e i r work.      ru1 these W i l l be i n addition t o the

          expected improvement i n the' quality of the procurement decision-making

          processes.

          Concluding remarks

               These eight f i n a n c i a l management problem areas confronting t h e Federal

          Goverrmen.t, which are by no means exhaustive, are gigantic and complex when

          vie9re.d as a irhole.         Hovever, specific problems usually become manageable

          and solvable when tackled one by one within an agency, a program, o r given
          geographical location.            This overall view of t h e many prablems should not

          serve t o driscowage u s since t h e t o p problems w i l l be solved by taking

          care of the szllaller and more manageable segments.           What i s needed first,

          of course, - a r e stated guiding goals and objectives, and then dedicated,

          competent peaple t o m r k on the individual parts of the problems-on              ,a
                                  . -

          coordinated basis-within            t h e frmework of the announced goals and objectives.




                                                                                           - 22 -