f! + @ llllllllllllllllllll 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 ~ 7A 2- L 7 ZlVi 177 1%. 1 ., /fr\ J.,- - -'*' : ,L < /I 7 l,! Q >' .- t 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 -
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)