oversight

Adequate Accountability Needed for Grants Awarded by the National Endowment for the Arts

Published by the Government Accountability Office on 1971-10-14.

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

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Adequate Accountability Needed For
Grants Awarded By The National                                              ,
Endowment For The Arts                     8-158817




National   Foundation   on the Arts and the Humanities




UNITED STATES
GENERAL ACCOUNTING                     OFFICE


                                          @CT.l4,b971
                         COMPTROLLER     GENERAL     OF      THE    UNITED     STATES
                                       WASHINGTON.    D.C.     20548




    B-158811

    Dear Madam Chairman:
            This is our report          entitled     adequate   accountability       needed
\    for grants     awarded by the National             Endowment for the Arts.           c'-'
    The report      also comments on the need for the National                   Founda-.    ..-
    tion on the Arts and the Humanities                  to develop    an effective
    internal     audit     organization        to assist   management in its
    decisions     relating      to grantees       and to furnish     information
    concerning     how the program activities              are being carried        out.
             The report    contains     recommendations     for your considera-
    tion.       We shall   appreciate      being advised    of your views on
    them and on the matters           discussed     in this report  so that we
    may consider       them in future       reviews   of the Endowment's
    activities.

            Your attention     is invited     to section    236 of the Legisla-
    tive Reorganization       Act of 1970 which requires          that you submit
    written     statements   of the action      taken with respect       to the
    recommendations.        The statements      are to be sent to the House                                 .'
    and Senate Committees        on Government Operations         not later    than
    60 days after       the date of this report        and to the House and
    Senate Committees       on Appropriations       in connection     with the
    first    request    for appropriations      submitted    by your agency
    more than 60 days after         the date of this      report.
            We are sending   a copy of this     report    to the Chairman,
    National    Endowment for the Humanities,         because of the shared
    interest    in the internal    audit staff.
                                                                   Sincerely            yours,


                                                                       ~~&.nLcdkJ’
                                                                   Director,            Civil    Division
    Miss Nancy Hanks
    Chairman,  National   Endowment    7I
       for the Arts
    National  Foundation   on the Arts                         ;
       and the Humanities




                               50 TH ANNIVERSARY                   1921 L 1971
    I
    I
    I
    I
    I   ,
    I
    I
    I
    I
    I       GENERAL ACCOUNTING OFFICE                                  ADEQUATE ACCOUNTABILITY   NEEDED
    I
    I
            REPORT TO THE CHAIRMAN,                                    FOR GRANTS AWARDED BY THE
    I       NATIONAL ENDOWMENT FOR THE                                 NATIONAL ENDOWI4~PJT FOR THE ARTS
    I       ARTS
    I                                                                  National         Foundation     on the
                                                                       Arts     and     the Humanities
                                                                                                   B-158811
    I       DIGEST
            ---_--
    I
    I
    I       WHY THE REVIEW              WAS MADE
    I
    I
    I                The General     Accounting      Gffice   (GAO) made a limited        review
    I                of grants     awarded    by the National      Endowment      for the Arts.
    I
    I                Th-e purpose    was to test      the procedures     designed     to ensure
    I                that  grantees     account    properly    for grant     funds.
    I
’   I
    I                GAO examined     the records      of two grantees:         the Coordinating
    I                Council   of Literary      Magazines       for the financial        assistance
    I
    I                provided    to small   literary       magazines     and Mr. George
    I                Plimpton    for the American        Literary     Anthology     series.
    I
    I
    I                GAO also      reviewed        efforts      being      made by the Foundation's
    I
    I
                     internal      audit     staff       to ascertain        whether    the grantees
    I                were properly          accounting        for    their     grant  funds     and
    I                whether     the Endowment's            programs        were being     axinistered
    I
    I                efficiently         and economically.
    I       FINDINGS          AND CONCLUSIONS
    I
    I
                      Adequate          accountability         of Federal     funds         for     the    two
                      grantees          did not exist.           For example:

                           --Disbursements          of    grant     funds    were not'reported                    in
                              proper     accounting        periods.         (See p. 7.1
    I
    I                      --Documentation           was lacking       to support      amounts              paid
    I                         for services         rendered    by     outside   parties.                  (See p.
    I
    I
                              7.1
    I
    I                      --Petty      cash disbursements          of      grant       funds      were     not
    I
    I
                              supported     by signed      receipts.                (See p.       7.)
    I
    I
    I
                           --Separate        accountability          was not maintained      over                      grant
    I                          funds:     grant    funds      were   commingled  with   personal
    I                          funds.     (See p. 8,)
    I

                      The Endowment  has made limited      use                  of      internal     auditing
                      as an element  of management    control.                          None of the grants
                      reviewed  by GAO have been reviewed                       by      the internal        audit
                      staff.
              Tear Sheet
                                                                                         OCT.14,197?
                                                                 1
     Between 1968 and 1970 the internal         audit staff     consisted
     of one person.      As of June 1971, the staff       consisted     of
     four auditors    but the Foundation's      Financial   Manager
     indicated   that it was expected      that the staff    would be
     increased   to five in the near future.
    24uch of the auditors'        work has consisted     of revising
    the Foundation's      guidelines     concerning    how the
    grantees    are expected      to account    for the grant funds
    and planning,     coordinating,      and reviewing     audit work
    performed    by other Federal      audit organizations       for the
    Foundation.
     The activities,        programs,     and accounting      system of the
     Endowment for the Arts have never been subject                   to a
     review by the internal           audit   staff.      Wo manual or
     other written       guidelines     have been developed        that state
     the objectives       of internal       audit    or the scope of work and
     standards     of performance       to be followed.        Reviews by
     the audit     staff    to date have been limited          to grant
     activities.
    The internal   audit    function   is under the supervision      of
    the Financial    Manager who also is responsible         for the
    management of the financial        resources   of the Foundation.
    This location    of internal     audit  in this organization
    tends to detract     from the independence      of the auditors.
RECOMMENDATIONS OR SUGGESTIONS
    The Chairman,        National     Endowment      for   the Arts,      should
       --require       that responsible    officials  determine   through
           discussions      and visits  with grantees    that proper
           accountability      is being maintained    over grant funds.
    The Chairman,     National Endowment for the Arts,  in
    cooperation    with the Chairman,   National Endowment                     for          I
    the Humanities,     should                                                              I
                                                                                            I

       --continue        efforts   to develop      an internal     audit staff              I

          of a size and capability            sufficient      to provide  balanced          I
                                                                                            I
          audit      coverage    of substantive       program and grant
          activities        and
       --raise      the internal        audit    location       within     the Foundation   I
                                                                                            I
           organization        to ensure adequate            independence.                  I
           If this     is not considered           feasible,       the Chairmen
           should take steps to provide                 assurance       as to the
           adequacy of (1) the scope and effectiveness                        of the
           internal      audit    function,       (2) the level         of staffing,        I
                                                                                            I
           and (3) the attention             paid to audit         findings      and        I
           objectives.                                                                      I
                                                                                            I
                                            2                                               I
                                                                                            I
                                                                                            I
                                                                                            I
                                                                                            I
                                                                                            I
I
    AGENCY ACTIONS AND UNRESOLVED ISSUES
        Foundation     officials      advised GAO that the Coordinating
        Council    had revised      and expanded its fiscal     and admin-
        istrative    policy      and that the Endowment for the Arts
        had agreed to make another            grant to the Coordinating
I       Council    contingent      upon the satisfaction     of the Chairman
I       of the Endowment that the deficiencies            noted by GAO
I
I       would be resolved         adequately.
I
I
I
         Foundation      officials      informed     GAO that the Foundation's
I        audit staff      would audit the Coordinating               Council's
I        records    after      a second payment had been made under the
I
         new grant.       According       to Foundation     officials,        this
I        audit   is scheduled        for this    fall.
I
I
I       The Chairman of the Endowment for the Arts notified
I       Nr . Plimpton      that the Endowment had decided not to provide
I
I
        additional     grant assistance      to the American Literary
I       Anthology     series.     The Chairman stated        that the Endowment
I
I
        believed    the American Literary         Anthology      would be better
I       operated    as a separate     corporation,       obtaining     funds from
I       sources other than the Federal            Government      and using the
I
I
        services    of the publishing      industry.
I
I        The Chairman explained             that the Endowment was changing
         its policy      regarding       grants     to individuals.            Under the
         new policy,       individual       grants will          be made to advance
         creative     activity      in the future           rather     than to give
         recognition       of past accomplishments.                   Concerning      GAO's
         comments on the need to develop                    an effective        internal
         audit    capability,       Foundation        officials        indicated      that,
         after    the expansion        of the audit           staff,     more audits
I        would be made of grantees*               records.           They stated      that
         guidelines      for the use of the auditors                   in reviews        of
         grantee     accounting       records     and expenditures             were being
         developed.




       Tear Sheet                              3
                       Contents
                                                      Page
DIGEST                                                  1
CHAPTER
   1      INTRODUCTION                                  4
   2      ACCOUXTABILITY FOR ENDOWIQZNTGRANT
          FUNDS BY TWO GRANTEES                         6
              Grant to Coordinating         Council
                of Literary    Magazines                6
              Grant to Hr. George Plimpton
                for the American       Literary
                Anthology    series                     8
              Conclusions                              11
              Recommendation      to the Chairman,
                National    Endowment for the
                Arts                                   11
   3      NEED TO DEVELOP EFFECTIVE INTERNAL
          AUDIT CAPABILITY                             12
              Conclusion                               14
              Recommendations   to the Chairman,
                National   Endowment for the
                Arts                                   14
GENERAL ACCOUNTING OFFICE                  ADEQUATE ACCOUNTABILITY NEEDED
REPORT TO THE CHAIRMAN,                    FOR GRANTS AWARDED BY THE
NATIONAL ENDOWMENTFOR THE                  XATIONAL ENDOWI$?NT FOR THE ARTS
ARTS
                                           National Foundation    on the
                                           Arts and the Humanities
                                                               B-158811
DIGEST
---_-_
WHY THE REVIEW WAS NADE
     The General Accounting    Gffice  (GAO) made a limited    review
     of grants   awarded by the National     Endowment for the Arts.
     The purpose was to test the procedures       designed  to ensure
     that grantees    account properly   for grant funds.
     GAO examined the records     of two grantees:        the Coordinating
     Council  of Literary   Magazines     for the financial       assistance
     provided  to small literary    magazines      and Mr. George
     Plimpton   for the American   Literary     Anthology    series.
     GAO also reviewed         efforts    being made by the Foundation's
     internal      audit staff      to ascertain   whether  the grantees
     were properly       accounting      for their  grant funds and
     whether     the Endowment's       programs were being administered
     efficiently       and economically.
FINDINGS AND CONCLUSIONS
     Adequate     accountability    of Federal   funds   for   the   two
     grantees     did not exist.     For example:
         --Disbursements       of grant funds were not reported        in
            proper   accounting    periods.   (See p. 7.)
         --Documentation     was lacking   to support    amounts paid
            for services    rendered   by outside  parties.     (See p.
            7.1
         --Petty    cash disbursements    of grant funds were        not
            supported   by signed receipts.       (See p. 7.)
         --Separate      accountability was not maintained   over          grant
            funds:    grant funds were commingled   with personal
            funds.    (See p. 8.)
     The Endowment has made limited    use of internal     auditing
     as an element of management control.     None of the grants
     reviewed  by GAO have been reviewed   by the internal        audit
     staff.

                                     1
    Between 1968 and 1970 the internal         audit    staff    consisted
    of one person.      As of June 1971, the staff         consisted     of
    four auditors    but the Foundation's      Financial      Manager
    indicated   that it was expected      that the staff       would be
    increased   to five in the near future.
    Much of the auditors'         work has consisted       of revising
    the Foundation's      guidelines     concerning    how the
    grantees    are expected      to account    for the grant      funds
    and planning,     coordinating,      and reviewing       audit work
    performed    by other Federal      audit   organizations       for the
    Foundation.
    The activities,       programs,     and accounting    system of the
    Endowment for the Arts have never been subject                to a
    review by the internal          audit staff.      No manual or
    other written     guidelines      have been developed      that state
    the objectives      of internal      audit or the scope of work and
    standards     of performance      to be followed.      Reviews by
    the audit staff       to date have been limited        to grant
    activities.
    The internal   audit    function   is under the supervision       of
    the Financial    Manager who also is responsible          for the
    management of the financial        resources   of the Foundation.
    This location    of internal     audit in this   organization
    tends to detract     from the independence      of the auditors.
RECOMMENDATIONS OR SUGGESTIONS
    The Chairman,       National     Endowment      for   the Arts,      should
      --require       that responsible    officials  determine   through
          discussions      and visits  with grantees    that proper
          accountability      is being maintained    over grant funds.
    The Chairman,     National Endowment for the Arts,  in
    cooperation    with the Chairman,   National Endowment                    for
    the Humanities,     should
      --continue     efforts   to develop      an internal     audit staff
         of a size and capability         sufficient      to provide  balanced
         audit   coverage    of substantive       program and grant
         activities      and

      --raise      the internal        audit   location       within      the Foundation
          organization       to ensure adequate            independence.
          If this is not considered              feasible,       the Chairmen
          should take steps to provide                assurance        as to the
          adequacy of (1) the scope and effectiveness                        of the
          internal     audit    function,       (2) the level          of staffing,
          and (3) the attention            paid to audit          findings      and
          objectives.
                                          2
AGENCY ACTIONS AND UNRESOLVED ISSUES
     Foundation     officials     advised     GAO that the Coordinating
     Council    had revised      and expanded its fiscal       and admin-
     istrative    policy      and that the Endowment for the Arts
     had agreed to make another            grant to the Coordinating
     Council    contingent      upon the satisfaction       of the Chairman
     of the Endowment that the deficiencies              noted by GAO
     would be resolved         adequately.
     Foundation      officials      informed     GAO that the Foundation's
     audit   staff    would audit        the Coordinating        Council's
     records    after      a second payment had been made under the
     new grant.       According       to Foundation     officials,         this
     audit is scheduled          for this    fall.
     The Chairman of the Endowment for the Arts notified
     Mr. Plimpton       that the Endowment had decided not to provide
     additional     grant assistance        to the American Literary
     Anthology     series.     The Chairman stated         that the Endowment
     believed    the American     Literary      Anthology     would be better
     operated    as a separate     corporation,        obtaining    funds from
     sources    other than the Federal          Government      and using the
     services    of the publishing        industry.
     The Chairman explained              that the Endowment was changing
     its policy      regarding        grants     to individuals.            Under the
     new policy,        individual       grants will          be made to advance
     creative     activity       in the future           rather     than to give
     recognition        of past accomplishments.                   Concerning      GAO's
     comments on the need to develop                     an effective        internal
     audit    capability,        Foundation        officials        indicated      that,
     after    the expansion          of the audit          staff,     more audits
     would be made of grantees'                records.           They stated      that
     guidelines       for the use of the auditors                   in reviews       of
     grantee     accounting        records     and expenditures             were being
     developed.




                                            3
                                       CHAPTER 1

                                    INTRODUCTION
       The General Accounting           Office      has reviewed      grants made by
the National        Endowment for the Arts to two recipients:                  the
Coordinating        Council    of Literary      Magazines     and Mr. George
Plimpton      for the American Literary             Anthology    series.     The pur-
pose of the review was to determine                  the effectiveness       of the
procedures       designed    to ensure that grantees            were properly
accounting       for funds provided        by the National        Endowment for
the Arts.        Our review was made at Endowment headquarters                   in
Washington,       D.C.,    and included      visits     to the Coordinating        Coun-
cil's    office     and the Office      of the accountant          for Mr. George
Plimpton      in New York City.
       The National      Endowment for the Arts and the National
Endowment for the Humanities         were created      by the National
Foundation    on the Arts and the Humanities           Act of 1965
 (20 U.S.C. 951).        The Endowment for the Arts was charged
with developing       and carrying   out a program of grants-in-aid
to groups or individuals         of exceptional     talent    engaged in or
concerned    with the arts to enable them to provide              for or support
productions,     projects,    or workshops      of professional      excellence.
        Although       the two Endowments are officially                designated
as the National           Foundation    on the Arts and the Humanities,                   a
central      authority      was not established           to administer        the so-
called     Foundation.          Each Endowment is headed by a chairman
who is appointed           by and is responsible            to the President          and
who is responsible            for establishing          and carrying       out the
Endowment's       program.        Each Endowment has a separate                staff,
except that an administrative                staff--responsible            for such
matters      as accounting        and auditing--serves           both Endowments.
The accounting           and auditing     activities        are under the immediate
supervision       of an official        designated        as the Foundation's
Financial      Manager.        As part of this review,            we inquired         into the
use by the Endowment of the internal                     audit   capabilities         to
assist     management in effectively               carrying     out its programs.
        The legislation         that created      the Endowments transferred
the existing       National       Council    on the Arts to the National
Endowment for the Arts.              This Council        is composed of 26 citizens
who are widely        recognized       for their     training,       experience,        and
interest    in the arts and whose responsibilities                      are to (1)
advise the Chairman of the Endowment regarding                        policies,       pro-
grams, and procedures             for carrying      out the Endowment's            functions
and (2) review        applications        for financial        assistance       received
by the Endowment and make recommendations                      to the Chairman.


                                             4
       In making our review of grantee          accounting    records,    we
considered   the Endowment's     guidelines,       general  instructions,
and fiscal    administration    policy    provided    to each grantee.
These issuances      provided that the grantees         were responsible
for
      --establishing        separate     accounts   for   each grant   project;
      --maintaining        supporting     records  of grant expenditures
         in sufficient       detail     to show the exact nature    of each
         expenditure:
      --maintaining      payroll   authorizations   to effect   proper
         control     over salaries    and wages charged against     grant
         funds;     and
      --maintaining         board of directors'      meeting   minutes,    res-
         olutions,       or other authorizations       which   affect   an
         Endowment       grant.
        Following      is a discussion       of our findings  concerning  how
the two grantees         were accounting       for the grants  awarded by
the Endowment and on the need for the development                 of an
effective      internal    audit   capability.




                                          5
                                       CHAPTER 2

                        ACCOUNTABILITY           FOR ENDOWMENT
                         GRANT FUNDS BY TWO GRANTEES
        The Coordinating      Council   of Literary     Magazines     and
Mr. George Plimpton,         editor   of the American       Literary   Anthology
series,    had  not   maintained     adequate   accountability       over  the
grants    awarded by the Endowment.
GRANT TO COORDINATING COUNCIL
OF LITERARY MAGAZINES
       The Coordinating      Council did not             maintain  adequate
accounting    over Endowment grant funds                 and documentation          to
support    many expenditures.
         The Coordinating        Council    was established          in 1967 to
(1) aid small         literary    magazines      and individual         artists      and
writers     through       awards, scholarships,         fellowships,         and grants,
(2) encourage        the formation       and development         of new magazines
and new types of magazines,               (3) foster      communication          and
disseminate       information      among magazine artists              and writers
and stimulate         and coordinate       their   activities,         (4) operate       a
center     which could receive         traveling      and visiting          artists,
writers,      and intellectuals,         and (5) sponsor         literary        confer-
ences and events.
       The Coordinating      Council   consists     of a board of directors,
an executive     committee,      and an executive     director responsible
for the day-to-day       operations    of the Coordinating     Council.
The board of directors        is assisted     by a board of consultants
and a grants     committee    which consists      of about five individuals
who represent      the board of directors,        the board of consultants,
and individuals       of the literary     community who are not members
of either    board.
       The Endowment awarded the Coordinating              Council    five
grants   totaling    $350,000 between 1966 and 1970.               At the time
of our review,     the Foundation's       internal     audit   staff    had made
no audit     of the Coordinating    Council's       grant records.         We
examined the Coordinating        Council's      records    pertaining      to
 (1) expenditures     under the grant awarded for calendar               year
1969 activities      and (2) selected       expenditures      under grants
for other periods.




                                             6
        dur review of the Coordinating               Council's      accountability
for   the grant funds showed that:
       --Because     separate     accountability        records     for each of
          the five grants        had not been maintained,            many expen-
          ditures    could not be related            to a specific      grant.
          For example,      four of the five grants were awarded to
          cover activities        during    the period      from March 1967
          to December 1969, however,              the grant periods        over-
          lapped.      The accounting       records     were maintained         on
          a calendar     year basis and did not correctly                relate
          expenditures      during     this period      to specific      grants.
          In its final      report     of expenditures        incurred     under
          one grant ended December 15, 1969, for example,
          the Coordinating        Council     included     costs incurred
          up to July 1970.
       --Decisions       of the executive          committee     affecting       the
          expenditure       of Endowment grant funds were not
          documented       and thereby       provided    no record       to substantiate
          that the amounts paid had been agreed to and were
          properly     authorized.         Minutes    of executive         committee
          meetings     in 1969 were not maintained.                 The minutes         of
          an October       1969 board of directors'             and board of
          consultants'       meeting      showed that payment of a bonus to
          all the Council's         staff     members in recognition             of
          past efforts       was authorized.          The chairman         and the
          treasurer      (the two members of the executive                   committee)
          were authorized        to set the amount of the bonuses.                      The
          decision     of the chairman          and the treasurer          to pay a
          bonus of $1,500 to the executive                 director      of the
          Coordinating       Council     was not documented           and apparently
          was not approved by the board of directors.                         Also
          the largest       grant made by the Coordinating                 Council--for
          $5,000--was       not approved by its board of directors.
       --Per diem payments exceeded the rate authorized         under
          provisions    of the Endowment grant.      Because of the
          inadequacy    of the records,   we were unable to determine
          whether    the Coordinating   Council  paid the amount in
          excess of the established      rate from its private    funds.
       --The Coordinating       Council    was unable to furnish  us with
          documentation     supporting     the amounts paid to consultants,
          what the consultants        did, how much time they expended to
          justify     the payments,     or how the rates of payment were
          determined.
       --Petty    cash disbursements   were not supported    by signed
          vouchers    showing when, by whom, and for what purpose
          the expenses were incurred.      For example,   miscellaneous
          petty   cash disbursements   amounting   to $841 during
          1969 were not supported     or documented   by vouchers.

                                             7
     In October    1970 we discussed      our findings  with Coordinat-
ing Council   and Endowment officials.        Generally  they agreed
with our findings.     Endowment officials       agreed also that there
was a lack of good accounting       control   by the Coordinating    Coun-
cil over the expenditures     reported.
       After     considering        our findings,      the Foundation's        Financial
Manager informed           the Chairman of the Endowment for the Arts
that our audit had included                enough information        to prejudice       the
Endowment's       consideration          of future    awards to the Coordinating
Council.       The Financial         Manager indicated,       however,      that the
Coordinating       Council      had revised       and expanded its fiscal
administration          policy    and had given assurance          that all future
executive      committee       actions     would be documented.          The
Financial      Manager stated          that more efficient        administration
should result         from these actions           and that there should be
no need to withhold            consideration        of any future      Coordinating
Council     applications        or awards.
        Acting     on this recommendation,              the National       Council    on
the Arts,       at its October-November               1970 meeting,      recommended
that a $100,000            grant for continued          support    of the Coordinating
Council's       activities         be contingent       upon the Chairman's         satis-
faction      that the deficiencies               noted by us had been adequately
resolved.       The grant was subsequently                approved by the Endowment
subject      to the reservation              that the deficiencies         be corrected
and to the requirement                 that the Endowment's        internal     audit
staff    make an audit           concerning       how the Council       was accounting
for Endowment funds prior                  to making a second payment under the
new grant.         According         to Foundation      officials,      this audit      is
scheduled       for this       fall.
GRANT TO MR. GEORGE PLIMPTON FOR THE
AMERICAN LITERARY ANTHOLOGY SERIES
        Our examination       of Mr. Plimpton's      records     relating      to
the Endowment's        four grants     for the American      Literary        Anthology
series    showed that Mr. Plimpton          had not placed the grant funds
in a separate      bank account      and had not maintained           separate
records    on the financial       transactions     for each of the Anthology
projects.      Rather,     all grant funds were commingled              with
Mr. Plimpton's      funds in his personal        checking      account.
         The American      Literary      Anthology       series   began in 1966
with a grant to Mr. George Plimpton.                       The purpose of the
American     Literary     Anthology        series    was to (1) establish          an
annual literary         anthology--       a collection        of selected   literary
works-- of the best American               poetry,     fiction,     essays,    and
criticism      from American        literary       magazines,      (2) award the
authors     whose work was chosen for publication                     in an anthology
up to $1,000,         and (3) award the editors               who published     the

                                            8
.        .

    work up to $500.          The Endowment       authorized       four    anthology
    projects     and expended     about     $190,900      to carry      out the projects.
    Of this    total,     about  $49,000     was paid       to Mr. George         Plimpton
    who conceived       the idea for      the Anthology        series      for    adminis-
    trative    costs    of the projects;        the remainder         consisted         of
    awards   to writers       and publishers       and was disbursed            directly
    by the Endowment.

          Works to be published        in the Anthologies          were selected
    on the basis     of comments     made by preliminary         readers   and judges
    who reviewed     numerous   poems,   short  stories,      essays,    and criti-
    cisms  submitted    by a variety     of small     magazines.

             At Mr. Plimpton's          suggestion,         we contacted           his accountant
    and requested          him to give       us all      pertinent         documentation
    supporting        the expenses        incurred       in connection           with    the Anthology
    projects.         He gave us a number             of monthly         bank statements,
    canceled       checks,      and receipt        and disbursement            ledgers      main-
    tained      for Mr. Plimpton's           financial         transactions          and copies       of
    miscellaneous          correspondence          which     related       to expenses       incurred
    in connection          with    the Anthology         projects.           We used this
    material       in an attempt        to verify        the grant         expenditures        re-
    ported     by Mr. Plimpton          to the Endowment.

            The canceled            checks       provided         to us in support           of
    Iilr . Plimpton's          reported        expenditures             accounted      for     (1) only
    $1,840       of the $2,350            reported        as payments          to preliminary           readers
    of works         submitted        by small        magazines          and (2) $12,750           of the
    $13,080        reported        as salary         payments         to directors         and employees
    involved         in the four          Anthology         series.        Since    no separate         records
    were kept          for   grant      funds      received         from the Endowment,              and
    since     payments         were made from Mr. Plimpton's                        personal       checking
    account,         we were unable            to positively             determine       whether      these
    payments         were made for purposes                   related       to the activities             for
    which      the grants         were made.            Also      canceled       checks,      paid
    bills,       or other        documentation            were not available               in support         of
    most reported            indirect        costs      totaling         about     $7,800     that
    were allocated             to the Anthology               projects.

            The above findings               were discussed             with   Endowment          officials
    who, in January            1971,      sent      a letter       to Mr. Plimpton's              account-
    ant that      summarized           the findings           for his comment.              In response,
    Mr. Plimpton's           accountant           admitted       that     no separate         bank account
    was maintained           for     the grant         funds     and indicated          that      he
    understood       that      this      was not necessary.                 He stated       that      work
    sheets     which     listed        each expenditure              by grant      and category             had
    been prepared.             Although         this     statement        was true,       it did not
    reflect     the fact         that     the work sheets              were prepared          after       he
    had been notified              of our intention              to audit      the grants           and
    were not maintained                currently         during      the period       of the grant.
                   .


                                                         9
                                                                                         .   .


        Mr. Plimpton's     accountant     also indicated      that documenta-
tion in the form of canceled           checks was customarily         available
to support     many of the expenditures          for the Anthology      series
and that canceled       checks constituted         one of the better       forms
of documentation.        Although     we did examine a number of canceled
checks which appeared to support             most of the expenditures          re-
ported,    we were unable to determine           whether   the checks repre-
sented payments pertaining          to the Anthology       series   since no
separate    records    were maintained       for the series      and since,      in
most cases, invoices,        bills,    or   vouchers   had   not  been  prepared.
       In June 1970 the Chairman of the Endowment for the
Arts notified      Mr. Plimpton     that the Endowment had decided
to provide    no additional      grant assistance.        The Chairman
stated   that the Endowment believed           the Anthology      would be
better   operated     as a separate     corporation,     obtaining     funds
from sources      other than the Federal         Government    and using
the services      of the publishing      industry.
        The Chairman also explained         that the Endowment was
changing    its policy   regarding     grants     to individuals.
Under the new policy,       individual      grants    will   be made to advance
creative    activity   in the future      rather    than give recogni-
tion of past accomplishments.


       The lack of adequate             accountability      over Endowment grant
funds by other         grantees     has also been the subject            of several
audit    reports     by the Endowment's          internal     auditor    prior    to
the time of our review.               In five reports       on completed       or
attempted      reviews,      two of which involved          the same grantee,
the auditor       indicated      that the grantees'         records     were incomplete
and that some were not auditable,                   that the grantees'        practices
were inadequate         to control       grant expenditures,          and that some
grantees'      accounting       practices     did not conform to the require-
ments of the grant conditions.
       We were informed           that,   subsequent    to these audits,          one
grantee     totally      reorganized      and improved     its accounting
functions,        another    grantee    was bankrupt      and records       supporting
the grant expenditures              had not been assembled,          and an additional
grantee's      records      were also considered        inadequate       for audit
purposes.         Subsequent      to the audit      of another     grantee,
the Endowment revised             its grant provisions        to delete      the
requirement         that a separate       bank account be maintained,             as
long as the grantee            maintained     proper   accountability        over
grant    funds.        The change was made because the auditor                 found
that the grantee          had maintained       adequate    accountability         over
the Endowment grant funds without                 the use of a separate           bank
account.


                                         10
CONCLUSIONS
       The lack of adequate accountability        over the Endowment
grant funds by the two grantees        whose records      we examined and
by those grantees      whose records   had been audited       or found to
be not auditable     by the internal    auditors,    indicates       that this
problem may be widespread.         The Endowment prepared        guidelines
governing    the type of accounting     records   and supporting         documen-
tation    to be maintained   by grantees.      The latest     revision     was
issued in April     1970.
        The revised   guidelines       are more specific     than those issued
previously     as to the records        which the Endowment expects
grantees    to maintain.      Although    the development      of these revised
guidelines     is an important       step, we believe     that a need exists
for the Endowment to assure itself            that its instructions       have
been implemented      by the grantees.
RECOMMENDATION TO THE CHAIRMAN,
NATIONAL ENDOWMENTFOR THE ARTS
       We recommend that Endowment officials      be required         to
determine    through    discussions and visits with grantees
whether proper      accountability  is being maintained    over       grant
funds.




                                     11
                                        CHAPTER 3

                           NEED TO DEVELOP EFFECTIVE
                            INTERNAL AUDIT CAPABILITY
        The Endowment has made very limited         use of internal
auditing    as an element of management control.           Our review
showed that the activities,        programs,     and accounting       system
of the Endowment had never been subjected             to a review by
internal    auditors   and that no internal       audit manual had been
developed    that stated    the objectives     of internal     audit,     the
scope of the internal       audit work to be performed,         or the
standards    of performance     to be followed     by the internal
auditors.
        The administrative           staff,     which is shared with the
National     Endowment for the Humanities,                  performs       the account-
ing, personnel,          administration          of grants,      audit,      and other
service     functions      common to both Endowments.                   From the
inception       of the Foundation           in 1965 to 1968, no audit               position
was authorized.           Between 1968 and Feburary               1970 one audit
position     was authorized.            During this period           only three
 audits   of grantees'        records       were completed.          Preliminary
audit work concerning            three other grantees             showed that the
grantees'       records    were so incomplete           that the audits            could
not be made.          The only other audit work performed                     involved      a
determination         of the overhead          rate which an additional              grantee
proposed      to use and a follow             on to a General Accounting
Office    report      in another       case.
       In two of the reviews        which were completed,          the auditor
reported     that the grantees'      accounting      practices     did not con-
form with requirements         of underlying      grant conditions.        In
one of these reports,        the auditor     stated     that the grantee's
management practices       were inadequate        to properly      control   grant
expenditures      and that there were significant             weaknesses   in
the control      and accountability      of expenditures        and matching
funds.
       Much of the auditor's      work at the time of our review
consisted    of revising     the Foundation's     guidelines    concerning
how the grantees       were to account    for grant funds and coordin-
ating    and reviewing     audits of grants     to colleges    and universi-
ties   that were made by audit      organizations       of other Federal
agencies.
      As important          as the development    of guidelines      for grantees
may be, it tends          to detract   from the primary      responsibility     and
the independence          of the auditor.      Consultation     between auditors


                                            12
.         .

    and the individuals            responsible      for developing     accounting         sys-
    tems is necessary          to ensure that adequate controls                are estab-
    lished,    particularly          by grantees,      but we believe     that the in-
    ternal    auditor      should not be assigned           the responsibility          for
    developing      and installing          methods,    systems,   or procedures.            He
    should,    however,       call    attention     to problem areas and necessary
    improvements       and he should be consulted              on proposed      corrective
    actions.
            The internal      auditor    is under the supervision            of the
    Financial     Manager who also has responsibility                 for the manage-
    ment of the financial           resources    of the agency.         The position
    of the internal         auditor    in an organization          is such that he
    should be independent           of the officials        who are directly         re-
    sponsible      for the operations         he reviews.        To provide     for
    an adequate degree of independence,                the internal       auditor
    should be responsible           to the highest       practical       organizational
    level,    preferably      to the agency head or to a principal                  official
    reporting      directly     to the agency head.
           We realize     that,      in a small organization,      complete
    separation     of duties        and responsibilities      may not be
    practical.       In these       cases:
              --The agency head should satisfy               himself       that the
                 official   to whom the internal            auditor      reports    not
                 only permits       but also encourages         the internal        auditor to
                 exercise    latitude     in setting      the scope of work and in
                 reporting     on results     of his audits.           The internal
                 auditor   should be sufficiently            independent         to be
                 able to make impartial         appraisals        of the operation
                 of agency programs         and activities,         including
                 those under the official          to whom the internal
                 auditor   reports.
              --The head of the agency should be concerned         with
                 the scope and effectiveness       of the internal  audit
                 function     and its staffing  and with the adequacy
                 of attention     paid to audit  findings   and
                 recommendations.
              --The internal      auditor,    when he deems it necessary
                 to the fulfillment        of his responsibilities,  should
                 have direct     access to the head of the agency.
             We were informed   in April    1971 that four additional         audit
    positions     had been authorized     by the Office       of llanagement    and
    Budget.      As of June 1971 the Financial         Manager informed      us
    that three had been filled.          According      to the Financial
    Manager when all these positions           are filled,      the major audit
    activity     will  continue   to be directed      to grantees.      We were

                                               13
                                                                                                   .          .


informed    also    that guidelines          were currently                      being     developed
 for use by the auditors           regarding      reviews                   of   grantees'       account-
ing records      and expenditures.

CONCLUSION

         Although         the auditing             of grantees'            use of grant        funds     is
an important            function,          internal         audit      should     not be limited
solely       to this        function.            Internal         auditing       should     extend     to
all    agency       activities           and related            management        controls.         In
addition        to reviewing             financial          transactions,           the internal
auditor        should       also     review        operations          and activities          so that
he may provide              management          with      information          on the effective-
ness,     efficiency,            and economy with                which      they    are being
carried        out.

           The     internal  audit   function                can    provide      a highly   valuable
service          to management     by reviewing,                   appraising,       and reporting
on   the     extent      and    nature      of    internal          compliance       with     management's
policies,          plans,      and procedures           as well          as with     applicable
legal     and      external       regulatory         requirements.

RECOMMENDATIONS TO THE CHAIRXAN,
NATIONAL ENDOWMENT FOR THE ARTS

         We recommend           that     the Chairman,           National       Endowment          foq
the Arts,          in cooperation           with      the Chairman,          National         Endow-
ment for         the Humanities,             continue       the efforts         to develop           an
internal         audit    staff      of sufficient            size    and capability             to
provide       balanced        audit       coverage       of substantive            program       and
grant      activities.            We recommend           also    that     the internal
audit      location      be raised           within      the organizational               framew‘ork
of the Foundation               to ensure          adequate      independence.              If this
is not considered               feasible,         we recommend         that     the Chairmen
take     steps       to provide        assurance         as to the adequacy               of (1)
the scope          and effectiveness              of the internal            audit      function,
 (2) the level          of staffing,             and (3) the attention                paid to audit
findings         and recommendations.




                                                   14