oversight

Air Force Audit Agency: Opportunities to Improve Internal Auditing

Published by the Government Accountability Office on 1990-02-20.

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

          .                                                        -.
              United   States   General   Accounting   Offke   *
              Report to -th&hairman, Subcommittee                  L
    GAO   -
              on Readiness, Committee on Armed
              Services, House of Representatives
                                           ._




              AGENCY
              Opportunities to
              Improve Internal
              Auditing

r
GAO
      United States
      General Accounting  Office
      Washington, D.C. 20548

      Accounting and Financial
      Management Division

      B-236992

      February 20,199O

      The Honorable Earl Hutto
      Chairman, Subcommittee on Readiness
      Committee on Armed Services
      House of Representatives

      Dear Mr. Chairman:

      At the request of the former Chairman of the Subcommittee on Readi-
      ness of the House Armed Services Committee, we have reviewed the
      effectiveness of the Air Force Audit Agency (AFAA). We based our
      assessment of AFti’s effectiveness on an evaluation of its resource allo-
      cation, use of military and civilian auditors, audit quality, and indepen-
      dence. This is the third’ in the series of requested reviews of internal
      audit organizations within the Department of Defense (DOD).

      We believe AFAA is generally providing effective audit service to the
      Department of the Air Force. During fiscal year 1988, AFAR reported
      potential monetary benefits of $339 million which might be achieved
      through implementing audit recommendations, bringing the total poten-
      tial monetary benefits AFAA has reported during the last 3 fiscal years to
      $2.2 billion. This amount represents approximately 17 percent of the
      monetary benefits reported by the 4 central internal audit organizations
      in DOD over the past 3-year period. AFAA’S recommendations have also
      led to other improvements without measurable monetary benefits.

      Despite significant achievements, we believe AFAA would be capable of
      greater accomplishments if it changed its method of planning and man-
      aging audits. AFAA conducts both broadly scoped audits of major, depart-
      mentwide operations, such as Air Force spare parts inventories, and
      more narrowly scoped audits of installation specific operations, such as
      a base motor pool. AFAA’s approach to planning these audits has been to
      allocate about one-half of its staff each year to audits of major opera-
      tions and about one-half to installation specific audits. Generally, audits
      of major operations achieve more significant results. For example, about
      87 percent of potential monetary benefits for fiscal year 1988 are attrib-
      uted to audits of major operations. These audits have also resulted in
      significant management improvements, such as improved internal con-
      trols, contracting procedures, and financial management systems. We

       ‘Kwal Audit %-vice: Effwtrwnrss    of Navy’s Internal Audit Organization Is Limited (GAO/
      AFMD-88-12    IW~mary 24. 1988). hrmy Audit Agency Staff Reductions and Audit Quality Issues
      tGAO/AFMD+Wl.       Apr11 “I. 1989)




      Page I                                               GAO/AFMD9016      Air Force Audit   Agency
                        B-236992




                        civilians would result in a loss in AFAA productivity and reduced poten-
                        tial monetary benefits. We believe civilian auditors could be phased into
                        the military auditor positions without decreasing productivity or audit
                        benefits.


                        The purpose of AFAA is to provide objective, constructive evaluations of
Background              the effectiveness and efficiency with which Air Force managers carry
                        out responsibilities in financial, operational, and support activities. AFAA
                        is headed by the Air Force Auditor General, a civilian, whose office is
                        located at AFAA headquarters at Norton Air Force Base (AFB), California.
                        The Auditor General reports to the Secretary of the Air Force.

                        AFAA   accomplishes its centrally directed audits through two operating
                        directorates: the Financial and Support Audit Directorate at Norton AFB
                        and the Acquisition and Logistics Audit Directorate at Wright-Patterson
                        AFB, Ohio. Two staff directorates and one line directorate responsible for
                        installation audits are also located at AFAA headquarters. In addition,
                        AFAA has staff at 8 audit regions aligned with Air Force major com-
                        mands and at 69 area audit offices located at Air Force installations
                        worldwide.

                        AFAA had a fiscal year 1989 authorized staffing level of 758 civilians and
                        235 military personnel. The AFAA budget for the fiscal year was approxi-
                        mately $33 million, with an additional $13 million for compensation and
                        benefits of military personnel.


                        Our objectives were to assess AFAA'S effectiveness by evaluating its
Objectives, Scope,and   (1) allocation of audit resources, (2) use of military and civilian audi-
Methodology             tors, (3) audit quality, and (4) independence.

                        To evaluate AFAA'S allocation of resources, we reviewed AFAA'S planning
                        process, audit coverage of major commands and budget areas, and
                        reported monetary and other benefits. In addition, we selected Air Force
                        acquisition audits for review from among the various functional areas
                        included in AFAA'S audit universe. We focused on the acquisition audits
                        because of recently disclosed improprieties in DOD acquisition practices
                        and the relatively large Air Force acquisition budget. We reviewed all
                        AFAA acquisition audit reports issued during fiscal years 1986 through
                         1988. Due to the security classifications, we did not review AFAA cover-
                        age of the Air Force’s most highly classified programs, known as “black
                        programs.”


                        Page3
                          B-236992




                          AFES,Arizona; McClellan AFB, California; and Travis AFB, California. Our
                          review was performed in accordance with generally accepted govern-
                          ment auditing standards.


                          AFAA’Saudit efforts during fiscal year 1988 resulted in reported poten-
Audit Efforts Have        tial monetary benefits of $339 million and included recommendations to
Benefited Air Force       improve systems of internal controls and other aspects of Air Force
Operations                operations. The following two examples of AFAA work illustrate some of
                          the contributions AFAAhas made to Air Force operations:

                      l   AFAA found that the Air Force had overstated spare engine requirements
                          for inactive aircraft, resulting in the improper retention of 435 aircraft
                          engines. In November 1987, AFAAreported that using these engines to
                          satisfy other valid requirements could save more than $20 million. Air
                          Force management agreed to consider engines for inactive aircraft in
                          determining future engine requirements.
                      l   AFXA conducts ongoing reviews of the Air Force’s accounting systems
                          design efforts to correct long-standing and significant problems in two
                          major accounting systems. In his 1988 annual report required by the
                          Federal Managers’ Financial Integrity Act of 1982, the Secretary
                          reported general ledger deficiencies in one of the systems and major
                          accounting weaknesses in the other system which processes transactions
                          for the $100 billion foreign military sales program.


                          In our opinion, AFAA appropriately distributed its resources in fiscal
AFNA Provides Broad       year 1988 to provide audit coverage to the 13 Air Force major com-
Audit Coverage            mands. However, later in this report we discuss opportunities for AFAA
                          to schedule more centrally directed audits which are more likely to have
                          a greater impact on improving the Air Force and its major commands.

                          We reviewed AFAA'S fiscal year 1988 year-end statistics and determined
                          that AFAAdevoted approximately 50 percent of its resources to produce
                          audit reports issued directly to the 13 major commands. In addition, cov-
                          erage of 9 major commands was included in 56 summary reports on cen-
                          trally directed, Air Force-wide audits issued to the Secretary of the Air
                          Force.

                          AFAAconsidered the significance and magnitude of all major budget
                          areas in determining the audit issues to be included in its fiscal year
                          1988 audit planning. We recognize that a comparison of the Air Force



                          Page6
B-236992




Centrally directed audits are planned and managed solely by AFAA'S two
operating directorates-one     at Norton AFES and one at Wright-Patterson
AFB. Centrally directed audits cover topics which generally have an Air
Force- or command-wide interest and result in systemic recommenda-
tions to top Air Force management or commanders. In addition, audit
reports which contain results of work done at the installation in support
of the centrally directed audits are often issued to installation com-
manders During fiscal year 1988, AFAA issued 87 summary reports and
677 installation level reports as a result of centrally directed audits.

Once the Auditor General approves AFAA'S operating directorates’
annual plans for centrally directed audits, each of the area audit offices
is told how many staff days will be needed to support these centrally
directed audits. Area audit offices then fill the remaining staff days
with self-initiated audits of activities at the individual installations.

Although AFAA headquarters provides guidance to area audit offices by
identifying general issue areas, installation level audits are planned and
executed by the area audit office managers and staff. Some of the instal-
lation level audits scheduled by area audit offices actually repeat the
audit work done through centrally directed audits which have been com-
pleted. The reports issued as a result of these centrally directed audits
contain systemic recommendations that will have an Air Force- or com-
mand-wide impact.

Installation level audits cover a variety of topics and contain recommen-
dations to the installation commander on actions to be taken locally.
Early in fiscal year 1989, the Auditor General asked each area audit
office to submit a copy of the most significant installation level audit
report issued in fiscal year 1988. We reviewed the reports submitted to
the Auditor General and found that they covered subjects such as man-
agement of travel funds, vehicle tires and batteries, and government-
owned household appliances. During fiscal year 1988, AFAA issued
863 reports to commanders as a result of installation level audits.

Approximately 55 percent of AFAA'S staff days in fiscal year 1988 was
devoted to centrally directed audits, managed exclusively by the two
operating directorates. However, there were a number of proposed cen-
trally directed audits which could not be scheduled and staffed because
resources were designated for installation level audits.

 Forty-five percent of AE'AA'S staff days in fiscal year 1988 was used to
 complete installation level audits, although the percentage of staff days


 page7                                    GAO/AFMDQO16AirForceAuditAgency
                      E236992




                      In our November 1977 report, we recommended the total civilianization
                      of AFAA. At that time, the Assistant Secretary of Defense and the Secre-
                      tary of the Air Force agreed with our recommendation and proposed a
                      gradual reduction of military officers over a 3- to 4-year period. Subse-
                      quent AFAAactions reduced the military staffing from approximately
                      50 percent to the current level of 25 percent of the auditors.

                      The total cost of filling positions with military personnel is greater than
                      filling those positions with civilian employees of comparable grade, pri-
                      marily because military personnel are entitled to greater compensation.
                      We estimate that the Air Force could save about $2 million annually
                      without any loss of audit expertise if AFAA’S military auditor positions
                      were replaced with civilian positions of comparable grade.

                      The Auditor General believes factors other than cost are important
                      when considering the use of military officers as auditors. The Auditor
                      General informed us that the Air Force believes the continued use of
                      military auditors is important to AFAA because they add to AFAA’S credi-
                      bility when reviewing military programs. In our opinion, the amount of
                      credibility added by military officers is difficult to judge. Other WD
                      audit organizations and GAO do not use military auditors and yet have
                      credibility when they review military programs.


                      Government auditing standards state that findings and conclusions in
Improvements Needed   audit reports should be supported by sufficient objective evidence. The
in Audit Quality      standards also require audit reports to be clear and accurate. AFAA Regu-
                      lation 175-101 states that “Every categorical statement, every figure,
                      every bit of data in the report of audit must be based on hard evidence
                      and be fully supported and documented in the working papers.”

                      We reviewed a sample of 12 summary audit reports and working papers
                      for centrally directed audits for compliance with evidence and reporting
                      standards. Although we identified audit quality problems with
                      4 reports, we found that 10 of the 12 audit reports generally complied
                      with the evidence and reporting standards4

                      We identified the following audit quality problems in the four reports:


                      4Althmgh most reports in our sample generally complied with evidence and reportii  standards, a
                      Comptxoller General decision (R-236940, Octckr 17,1989) said a recent AFXA audit of the Air Force
                      Stock Fund and the Aviation Fuel Management Accounting System did not have a sufficiently broad
                      audit scope to support some of its conclusions.




                      Page 9                                                GAO/AFWDW16        Air Force Audit &ency
                    B-236692




                    draft report has been referenced in accordance with AFAApolicy. Fur-
                    thermore, we believe referencing to original working papers is a
                    stronger quality control than referencing to summary documents
                    because there is less opportunity for error. If the logistics of shipping
                    working papers from audit sites to the operating directorate are too bur-
                    densome, other audit quality control measures could be taken. For
                    instance, AFAA could require that the summaries written by auditors at
                    each site, or by the audit manager, be referenced to original working
                    papers before those summaries are used as a basis for drafting a report
                    to top Air Force management.


                    Based on our review of a sample of 12 audit reports and working papers
AFAR Independence   and AFAA’Sorganizational placement, we found that AFAA has operated
                    independently in accordance with generally accepted government audit-
                    ing standards. As a result of departmental changes in accordance with
                    the Goldwater-Nichols DOD Reorganization Act of 1986, the Auditor Gen-
                    eral reports directly to the Secretary of the Air Force with no oversight
                    or supervision from other Secretariat offices. We found that AFAAseeks
                    management’s input as part of the annual audit planning process, but
                    we did not find that management inappropriately influences AFXA’S
                    audit planning or prohibits AFAA from auditing any Air Force programs
                    or activities. Nor did we find that management inappropriately influ-
                    enced the content of the sample of 12 audit reports we reviewed for
                    audit quality.

                    However, in the perception of some, including members of the Congress
                    and some civilian auditors in A&M, AFAA’Smilitary auditors are not
                    viewed to be as independent and objective as civilians. We found no evi-
                    dence in our review of 12 audit reports and working papers to corrobo-
                    rate this perception.

                    On April 14,1989, the DOD Office of Inspector General, Assistant Inspec-
                    tor General for Audit Policy and Oversight, reported on an investigation
                    of anonymous allegations made against senior AFAA officials. The allega-
                    tions centered around (1) suppression of audit findings, recommenda-
                    tions, and audit reports, primarily by senior military auditors,
                    (2) independence and qualifications of military auditors, and (3) various
                    administrative procedures and policies affecting auditor promotion and
                    independence. After the allegations were made, the Air Force and the
                    Auditor General took the initiative and made a number of changes to the
                    administrative procedures and policies affecting auditor promotion and



                    page11                                   GAO/AFMD90-16AirForeeAuditAgency
                      5236362




                      However, we believe AFAA could improve its overall effectiveness. If
                      AFAAchanged its philosophy of devoting one-half of its resources to
                      installation level audits, centrally directed and installation audits could
                      be scheduled based on their relative, individual merits.

                      AFAAis the only DOD central audit organization which uses permanent
                      military auditors. The Air Force could save about $2 million annually in
                      personnel compensation costs without any loss in audit expertise if AFAA
                      military auditor positions were replaced with civilian auditor positions
                      of comparable grade.

                      Although AFAAaudit reports and working papers generally comply with
                      audit standards, AFAA audit quality could be improved. In reports where
                      we found audit quality problems, the referencing procedure was not
                      always followed. In addition, MM’S referencing policy could be
                      improved by requiring referencing to original working papers or, at a
                      minimum, by requiring that summaries be referenced to working papers
                      before being used as a source for writing audit reports.


                      In order to improve AFAA'S planning and scheduling of audits, we recom-
Recommendations       mend that the Secretary of the Air Force direct the Auditor General to
                      plan audits throughout AFAA based on the individual merits of the audits
                      rather than a predetermined allocation of resources between centrally
                      directed and installation level audits.

                       To reduce the costs of AFAA operations, we recommend that the Secre-
                       tary of the Air Force replace all military auditor positions with civilian
                       positions.

                       To improve the quality of AFAAaudit reports, we recommend that the
                       Secretary of the Air Force direct the Auditor General to

                  l    require that all draft audit reports be referenced to original audit work-
                       ing papers or, at a minimum, to auditors’ summaries which have been
                       referenced to original working papers at each site before those summa-
                       ries are used to prepare final audit reports and
                  l    require that associate directors provide assistant auditors general writ-
                       ten confirmation that each draft audit report has been referenced in
                       accordance with AFAApolicy.




                       page13
-
    B-236992




    This report was prepared under the direction of John J. Adair, Director,
    Audit Oversight and Policy. Other major contributors are listed in
    appendix II.

    Sincerely yours,




    Donald H. Chapin
    Assistant Comptroller General




     Page 16                                  GAO/AFMD+WlS   Air Force Audit Agency
             Appendix I
             comments From the DepIwtment of Defense




                                                                                                            2
internal       auditing      services       to all      organizational             levels--
including       line     and staff       managers       at major         commands and field
installations.            The Air Force Audit               Agency has initiated               a study
to assist       in the prioritization                 of resources          to support        both
centrally       directed       and installation             audits       and develop        a
mechanism       and approach          for increasing           the level          of resources
allocated       to centrally         directed         audits.      Estimated          completion
date of the study            is June 30, 1990--with                 full      implementation           in
FY 1992.        The results         will    partially         impact       audits     planned      for
FY 1991.
        The DOD acknowledges            the 1977 agreement             to implement               the GAO
recommendation         to convert       all    military       auditor      positions            to civilian
positions.        The Air Force did not,                however,      unilaterally              decide     to
retain      25 percent      of its    auditor        authorizations          as military
positions.        Based on former           Air Force Secretary              Stetson's
communications         with    the Chairmen          of the House Government                    Operations
and Appropriations            Committees       and the Senate          Subcommittee              on Defense
Appropriations         during     the 1979 appropriation               hearing,        an       agreement   was
reached      to retain      annual    funding        for 25 percent          military           auditor
authorizations          in the Air Force Audit               Agency.
          The relatively           modest amount of personnel                  cost savings          that
would be achieved              by converting         military        auditor       positions       to
civilian       positions        would be far more than offset                      by decreased
productivity          resulting         from the replacement              of some 200
experienced         military         auditors    with      entry-level         civilian       auditors
that      are unfamiliar           with Air Force activities.                    The entire
Defense       Department         is currently        undergoing         a detailed         review      of
military       and civilian           manpower     requirements           to determine          where
civilians       can be used effectively                  to free up military               resources
for combat        and combat          support    requirements.              All Air Force
military       positions        will      be considered         during      the review,
including       the Air Force auditor                positions.
         Since    the question          of Military         Department        audit     independence
is periodically            raised,      the Department          is particularly             gratified
that     the GAO found the Air Force Audit                      Agency has operated
independently,          in accordance           with     Government        Auditing       Standards,
and that       management        has not inappropriately                 influenced         audit
planning       or prohibited          the Air Force Audit             Agency        from auditing
any Air Force programs                or activities.            Further,        the GAO did not
find     management        inappropriately           influenced       the content           of audit
reports!       nor did the GAO find               evidence      to corroborate            a
perception        that    military        auditors       are not as independent                and
objective        as civilians.
        The Department       is committed        to effective      internal      audit
organizations         within   the Military        Departments     and continually
monitors       them through      various    quality     assurance      reviews.       As a
part    of that     process,     the Office      of the Inspector         General,     DOD,
will    monitor     the implementation         of agreed-upon        actions     in
response       to the recommendations          contained      in the GAO draft
report.




              Page 17                                                       GAO/AF’MB96.l6       Air Force Audit Agency
         Appendix1
         CommentsFrom         theDepartmentofDefense




                    GAO DRAFT REPORT - DATED OCTOBER 31,                            1989
                         (GAO CODE 903102) OSD CASE 8166
                    "AIR     FORCE AUDIT AGENCY:  OPPORTUNITIES                          TO
                                IHPROVE INTERNAL AUDITING"
                               DEPARTMENT OF DEFENSE COMMENTS
                                                l    ****


                                                    FINDINGS
FINDING A:              Backqround:            Air Force Audit             Asency.         The GAO
observed         that      the purpose          of the Air Force Audit                   Agency     is to
provide         objective,           constructive           evaluations         of the effectiveness
and efficiency               with     which Air Force managers                    carry      out
responsibilities                 in financial,            operational,          and support
activities.              The GAO explained                that    the agency         accomplishes         its
centrally          directed          audits     through        two operating           directorates--
 (1) the Financial                 and Support          Audit     Directorate          located      at Norton
Air Force Base, California,                          and (2) the Acquisition                   and Logistics
Audit       Directorate            located      at Wright-Patterson                Air Force Base,
Ohio.        The GAO pointed                out that        the agency         also has two staff
directorates             and one line            directorate          responsible          for
installation             audits        located       at the agency            headquarters--along
with      a staff        at eight         audit      regions      aligned       with     Air Force major
commands and 69 area audit                         offices       worldwide.

The GAO noted          that the Air Force Audit         Agency had a FY 1989
authorized       staffing     level   of 758 civilians        and 235 military
personnel.        According      to the GAO, the agency          budget    for the
fiscal     year was approximately         $33 million--with          an additional                         $13
million      for compensation       and benefits       of military      personnel.
The GAO also observed         that    the Air Force Audit         Agency                      audit
efforts     during    FY 1988 resulted      in reported       potential                       monetary
benefits     of $339 million       and included     recommendations                           to improve
systems     of internal    controls      and other    aspects     of Air                      Force
operations.
DOD RESPONSE:       Concur.      The DOD agrees      that   the Air Force Audit
Agency reported      potential     monetary    benefits     of $339 million        in
FY 1988 and made recommendations            to improve      systems    of internal
controls  and other      aspects     of Air Force operations.           The Office
of the Inspector      General,      DOD, reviewed       the $339 million      and
concluded  that     $84 million      should   not have been claimed         as
monetary  benefits.
FINDING B:        Air Force Audit       Aaencv Provides        Broad Audit
Coveracre.      The GAO concluded         that,    in FY 1988, the Air Force
Audit    Agency    appropriately      distributed      its   resources   to provide
audit    coverage     to the 13 Air Force major            commands.   The GAO
reviewed     the Air Force Audit         Agency FY 1988 year-end          statistics
and determined        that    the agency     devoted   approximately      50 percent


                                                                             Enclosure




          Page19                                                         GAO/AFMD-90-16AirForceAuditAgency
          Appendix I
          cemmenta From the Department of Defense




                                                                                                            3

DUD RSSPONSE:             Concur.        The DOD agrees           that,       as a rule!
centrally        directed       audits     produce       more     significant          audit    results
than those         addressing        local    installation            issues.        The Air Force
Audit      Agency has initiated              a study       to assist          in prioritization         of
resources        to support         both centrally           directed         and installation
audits      and develop         a mechanism        and approach             for increasing         the
level      of resources         allocated       to centrally            directed       audits.
Estimated        completion         date of the study             is June 30, 1990--with
full      implementation          in FY 1992.          The results            will   partially
impact      audits      planned       for FY 1991.
FINDING D:        Use of Civilian           Auditors     Would Reduce Costs.             The GAO
observed    that,        as of November        1988, the Air Force Audit             Agency
had 204 military           officers      serving      as auditors--or        approximately
25 percent     of the total            of 792 auditors.          The GAO pointed         out
that   DOD Directive           1400.5,    DOD Policy      for Civilian        Personnel,
states   that     civilian        employees      will   be used,      as follows:
        "...in      all   positions    that   do not require     military
        incumbents        for reasons     of law, training,      security,
        discipline,         rotation,    or combat readiness,        or that                do
        not require         a military    background     for successful
        performance         of the duties     involved."
The GAO referred          to a November         1977 GAO report         (0% Case 4573-A)
in which the GAO recommended                total    civilianization          of the Air
Force Audit       Agency.       According       to the GAO, the Assistant
Secretary      of Defense       and the Secretary            of the Air Force agreed
with     the recommendation          and proposed        a gradual      reduction      of
military     officers       over a 3- to 4-year            period.      The GAO pointed
out that     subsequent        audit    agency    actions       reduced    the military
staffing     from approximately            50 percent--to           the current    level  of
25 percent       of the total        number of auditors.
In addition,        the GAO found that           the total         cost of filling
positions      with    military        personnel      is greater        than filling         those
positions      with     civilian       employees      of comparable         grade--primarily
because    military         personnel       are entitled       to greater         compensation.
The GAO estimated              that  the Air Force could            save about        $2.0
million    annually          if the military       auditor       positions        in the Air
Force Audit        Agency were replaced            with    civilian        positions       of
comparable       grade.
The GAO acknowledged                that   the Air Force Auditor                  General      believes
that      factors      other    than cost are important                  when considering             the
use of military            officers       as auditors.           According          to the GAO, the
Auditor        General     stated      it is the continued               position        of the Air
Force that          use of military          auditors        is important           to the agency
because        the military         add to the agency             credibility          when reviewing
military         programs.        The GAO concluded,             however,         that    the amount
of credibility            added by military            officers        is difficult          to
judge--pointing            out other       DOD audit        organizations             and the GAO do
not use military             auditors      and still        have generally             recognized
credibility           when they review          military        programs.

DUD RESPONSE:       Concur.       The DOD agrees       that   some amount of
personnel    cost   savings     would result       from converting      military
auditor   positions      to civilian    positions.          The Department       also




           Page 21                                                      GAO/APMD9@16 Air Force Audit Agency
        Appendix1
        comments!+onltheDepartmentofDefense




                                                                                                         5
DOD RESPONSE:          Concur.        The DOD agrees          that   the Air Force Audit
Agency Assistant           Auditors       General      should    be provided      written
assurance     that      referencing        has occurred.           The DOD also       agrees
that   summaries        from each audit           site    should    be cross-referenced              to
the original        working       papers.      The Air Force Audit           Agency will
revise    its   directives         to accomplish          the above.

FINDING F:        Air Force Audit           Aaencv Indewndence.                  The GAO found
that    the Air Force Audit           Agency has operated               independently,           in
accordance      with    generally       accepted      Government          Auditing
Standards.        The GAO pointed           out that    the Auditor           General        of the
Air Force reports          directly       to the Secretary           of the Air Force with
no oversight        or supervision          from other       Secretariat          offices.         The
GAO found that,         while     the Air Force Audit              Agency seeks management
input     as part     of the annual         audit   planning        process,       management
does not inappropriately              influence       audit      planning        or prohibit
auditing     any Air     Force programs           or activities.             Further,        the GAO
pointed     out it did not find             that   management         inappropriately
influenced      the content         of the sample of audit                reports       reviewed
for audit      quality.
The GAO did acknowledge                 that,       in the perception            of some,
including         certain       members of the Congress                and some civilian
auditors,         the agency's         military        auditors      are not viewed         as being
as independent             and objective          as the civilian          auditors.        The GAO
indicated,          however,      that     its    review     disclosed        no evidence      to
corroborate          the perception.              The GAO further           referenced      an
Inspector         General,       Department         of Defense,        investigation        of
allegations          made against          senior      Air Force Audit           Agency
officials.           According       to the GAO, the Inspector                   General    reported
that      the investigations             "did     not disclose         any conclusive         evidence
that      senior     military       auditors        have suppressed           the reporting        of
results"         or that      they "had not otherwise                performed       their    audit
work in an independent                 manner."
DOD RESPONSE:        Concur.      The Air            Force Audit     Agency has         operated
independently      and in accordance                 with  generally     accepted
Government    Auditing       Standards.
                                            ******

                                        RECOMMENDATIONS
RECO~NDATION           1:     The GAO recommended        that  the Secretary        of             the
Air Force direct          the Auditor     General     to plan audits       throughout
the Air Force Audit             Agency based on the individual            merits    of             the
audits--rather         than a predetermined         allocation       of resources
between      centrally      directed   and installation        level    audits.

DOD RESPONSE:             concur.        The DOD agrees        that    centrally        directed
audits,       as a rule,         produce      more significant         audit     results       than
those     addressing         local     installation        issues.       It is also the
position        of DOD that         as the sole internal            audit     function       for the
Air Force,           it is essential          that   the Air Force Audit            Agency
provide       internal       auditing       services     to all     organizational
levels--including              line    and staff       managers     at major       commands and
field      installations.             The Air Force Audit           Agency has initiated             a




         Page23                                                      GAO/AFMD-90-16AirForceAuditAgency
       Appendix I
       cemmenteFromtheLkpartmeatofDafeuae




                                                                                              7
guidance   was published   on November   14! 1989.                  The estimated
completion   date for issuing   the revisions    to               the directives        is
March 31, 1990.

-4:                       The GAO recommended    that   the Secretary       of the
Air   Force direct    the Auditor     General to require       that  Associate
Directors    provide    Assistant    Auditors General     written    confirmation
that    each draft   audit    report  has been referenced        in accordance
with    Air Force Audit     Agency policy.
PpD RESPOND:         Concur.     Air Force Audit        Agency   directives          will    be
revised    to require      that  Assistant     Auditors     General      are provided
written    assurance     that   each draft      report   has been referenced              in
accordance     with   Air Force Audit        Agency policy.         Interim      guidance
was published       on November     14, 1989.       The estimated         completion
date for issuing       the revisions       to the directives          is
March 31, 1990.




        Page28                                                GAO/~gOlGAirForceAuditAgency
Appendix II

Major Contributors to This Report


                            Rex Simmons, Assistant Director, Audit Oversight and Policy,
Accounting and              (202)275-9356
Financial Management        H. Vernon Davis, Evaluator-in-Charge
Division,     Washington,   Ann R. Lewis, Evaluator
DC.

                            James E. Fuquay, Regional Assignment Manager
Cincinnati Regional         Jimmie D. Leonard, Site Supervisor
Office                      Lori A. Williams, Evaluator


                            Charles E. Payton, Regional Assignment Manager
Los Angeles Regional        Phillip Abbinante, Evaluator
Office




(911634)                    Page 26                                GAO/AFMD--9016 Air Force Audit Agency
         Appendix1
         cQIamentsF%onltheDepartmentofDefense




                                                                                                             6
study     to assist        in prioritization         of resources           to support        both
centrally       directed      and installation          audits.          The study      will
develop       a mechanism       and approach       to increasin?            the level        of
resources       allocated       to centrally       directed         audits.        Estimated
completion        date of the study           is June 30, 1990 with                full
implementation           in FY 1992.         The results       will      partially       impact
audits      planned      for FY 1991.
RECOMKFZNDATION 2:              The GAO recommended              that    the    Secretary         of   the
Air Force  replace            all  military  auditor             positions       with     civilian
positions.
WD RESPONSE:             Nonconcur.      It is the DOD position            the relatively
modest amount : of personnel             cost savings      that     would result      from
convertina       mi .litary    auditor     positions    to civilian        positions      would
be far m&e than offset               by decreased      productivity        and reductions
in audit      identified       potential      monetary    benefits      for an extended
period     of time.
The entire       Defense     Department     is currently      undergoing       a detailed
review    of military        and civilian     manpower    requirements         to
determine       where civilians         can be used effectively          to free up
military      resources      for combat and combat support             requirements.
All Air Force military            positions    will    be considered       during     the
review,     including     the Air Force auditor          positions.
Of special       concern       to the DOD is the significant                         loss of
productivity         that    would result            from the loss of scme 200
experienced        military       auditors        and their          replacement         with    civilian
auditors,      primarily         at the entry            level!     who would be unfamiliar
with     Air Force activities.                 At the beglnning              of FY 1978, when the
Air Force Audit            Agency    started        converting          from a 50/50 civilian
military      mix to a 75/25           civilian         military        mix,    the Audit        Agency
was authorized           548 military          positions.            By the end of FY 1982,
the number of military               positions          was reduced          to 256.        During       the
same 5-year        period,       Air Force Audit               Agency production            of Air
Force and major            command level          summary reports              declined       from 98
for FY 1978 to 46 for FY 1982.                         The DOD would have difficulty
competing      with      the private          sector       in hiring       a large       number of
experienced        auditors        in a short          period      of time;        in any event,
there      is a lack       of availability             of auditors         that      have knowledge
and experience           in Air Force activities                   and that       would not require
extensive      training        before      becoming          fully     productive.

RECOMMENDATION 3:          The GAO recommended          that     the Secretary       of the
Air Force direct        the Auditor      General      to require       that  all   draft
audit   reports   be referenced       to original         audit     working    papers    or,
at a minimum,      to auditors'      summaries--which           have been referenced
to original     working     papers   at each site         before     those   summaries
are used to prepare         final   audit    reports.

DOD RESPONSE:          Concur.   Air Force Audit        Agency directives        will                        be
revised      to require     that draft   reports      be referenced      to auditors'
summaries      from each audit      site   which,     in turn,    have also been
cross-referenced         to the original      working    papers.      Interim




         Page24                                                        GAO/APMD-SM6AirForceAuditAgeacy
        Appendix I
        Comments From the Department of Defense




                                                                                                    4

acknowledges        that,     in 1977, the DOD agreed               to implement          the GAO
recommendation         to convert      all    military       auditor       positions        to
civilian.        The Air Force did not,              however,       unilaterally          decide   to
retain     25 percent       of its    auditor       authorizations           as military
positions.         The decision       was a cooperative             decision        based on
former     Air Force Secretary           Stetson's        communications            with    the
Chairmen      of the House Government               Operations        and Appropriations
Committee       and the Senate        subcommittee          on Defense         Appropriations
during     1979 appropriation          hearings.          The agreement           to retain
annual     funding      for 25 percent        military        audltor      authorizations        in
the Air Force Audit             Agency was based on rationale                    other    than cost
considerations.
FINDING E:            Cy.                                                        The GAO
explained         that     Government       Auditinq      Standards     state    that  findinqs
and conclusions              in audit     reports       should   be supported       by
sufficient          objective       evidence.         According      to the GAO, the
standards         also     require     audit     reports      to be clear     and accurate.
The GAO pointed              out that     Air Force Audit          Agency Regulation
175-101        states      that    "Every     categorical       statement,     every   figure,
every      bit    of data in the report               of audit     must be based on hard
evidence         and be fully         supported       and documented        in the working
papers."
The GAO reviewed         a sample       of 12 summary audit       reports     and working
papers     for centrally       directed      audits    for compliance      with    evidence
and reporting       standards.         The GAO found audit        quality     problems
with   four reports--however,             the GAO indicated       that    10 of the 12
audit    reports    generally       complied      with the evidence       and reporting
standards.
The GAO described           Chapter     18 of Air Force Audit              Agency      Regulation
175-102,      which    establishes       a quality        assurance      procedure        to
ensure     the accuracy         of audit     reports.         According      to the      GAO, the
procedure,        known as referencing!             requires      an Air Force         Audit
Agency auditor         not associated          with    the audit       to review       the draft
audit    report      to verify     that    "specific        statements       of fact      are
supported       by documentary        evidence."
The GAO found that           Air Force auditors         do not generally            reference
draft    audit     reports    to original      working      papers--instead,           they are
referenced       to summaries        of facts   prepared       by the auditors           at each
audit    site    and/or     by the audit      manager     responsible         for drafting
the final      report.       The GAO reviewed        the summaries          at the sites
and found      instances       in which discrepancies           between       items
contained      in working        papers   and items     in the auditor's            summaries
were repeated          in the final     audit   report.
The GAO concluded               that,      in order      to ensure    that    the referencing
procedure         is followed          on all     Air Force Audit        Agency draft
reports,        associate         directors       responsible      for individual          audits
should      furnish       written        confirmation        to the Assistant        Auditors
General       that    each draft          report      has been referenced         in accordance
with     the agency        policy.           The GAO further       concluded      that
referencing         to original           workinq      papers   is a stronaer        quality
control       than referencing               to summary documents          because-there-is
less opportunity              for error.




         Page 22                                                   GAO/AFMD9@16 Air Force Audit Agency
                                                                                                                  .

of its     resources    to produce      audit    reports    issued    directly      to the
13 major      commands.     The GAO also noted that            coverage      of nine
major     commands was included         in 56 summary reports           on centrally
directed,      Air Force-wide      audits     issued     to the Secretary       of the
Air Force.
The GAO explained     that    the Air Force Audit   Agency   considered                                    the
significance     and magnitude     of all major budget   areas   in
determining    the audit    issues   to be included   in its   FY 1988                                 audit
planning.
The GAO further            found that       the agency       provided       audit     coverage       to
all    significant         procurement        areas    and major weapon systems                 within
the Air Force acquisition                 organization          during    FY 1986 to FY
1988.       The GAO pointed          out that,       during       that   3-year      period,      the
agency       issued    164 audit       reports      on acquisition          areas--such         as
logistics,         supply,     maintenance,         and weapon systems.               According        to
the GAO, the agency              addressed       a variety        of issues,       including        (1)
requirements          determination!          (2) contracting          and contract
administration,             (3) acquisition         management!        and (4) pricing.               The
GAO added that           Air Force acquisition              officials       indicated        they
were satisfied           with    the service        provided        by the Air Force Audit
Agency       in the area of acquisition                audits.
DOD RESPONSE:        COnCUr.       The DOD agrees  that the issue     oriented
planning     process     used by the Air Force Audit      Agency  effectively
identified      the more significant       Air Force functions    and programs
for allocating       its    resources.

FINDING C:            More Sisnificant            Accomulishments              Would Be Possible.
The GAO observed             that      the Air Force Audit                Agency       basic       operating
philosophy          is to allocate            its   staff       days evenly           between        centrally
directed       audits       and installation              level      audits.          According         to the
GAO, the agency             believes        that    the installation                level       audits      are
important         to local       commanders         inasmuch         as the Air Force                 (unlike
the Army) does not have an internal                             review      function          to provide
that     service.         The GAO pointed             out,      however,       that       the philosophy
actually        becomes a constraint                on scheduling             centrally          directed
audits,       which the agency              generally        gives      higher        priority.            The
GAO emphasized            that,      since      about half         of the agency's               resources
are committed           to installation-level                   audits,       operating
directorates           are unable         to schedule           higher      priority          centrally
directed        audits.
The GAO concluded               that     the Air Force Audit            Agency would do more
centrally        directed         audits--and         its   accomplishments            could    be more
significant--if              centrally       directed       and installation-level                audits
were planned           based on the relative                merits     of each audit
proposal.          The GAO contrasted               that    to the current           practice       of
initially         allocating          half   the audit        resources      to each type of
audit.         The GAO indicated             that     annual     audit    planning        decisions
could        be based on significant                factors--such          as (1) mission
criticality,            (2) financial          integrity,        (3) budget        size,      and (4)
vulnerability            of the activity            to fraud,       waste,     and abuse.




          page20
        Appendix I
        C41mment.9 From the Departma   t of Defense




                                                                                       3

       The Department     appreciates     the constructive       and professional
manner in which the GAO conducted            the review      and is pleased     with
the GAO assessment       of the effectiveness          of the Air Force Audit
Agency.     The detailed     DOD comments on the GAO findings            and
recommendations      are provided     in the enclosure.         Thank you for the
opportunity     to comment on the draft         report.
                                         Sincerely,



                                         Inspector    Gener
Enclosure




            Page 18                                      GAO/AFMD-6@16 Air Force Audit Agency
Comments From the Department of Defense




            Mr. Donald    H. Chapin
            Assistant    Comptroller    General
            Accounting    and Financial    Management                Division
            U.S. General     Accounting   Office
            Washington,    DC 20548
            Dear   Mr.       Chapin:
                    This    is the Department           of Defense      (DOD) response     to the
            General      Accounting     Office       (GAO) draft     report,       "AIR FORCE AUDIT
            AGENCY:       Opportunities        to Improve      Internal      Auditing,"    dated
            October      31, 1989 (GAO Code 911634/OSD               Case 8166).        The DOD
            concurs      with   the report       findings     and recommendations         with   the
            exception       of the recommendation           to convert       military    auditor
            positions       to civilian      positions.
                   The DOD agrees          that:
                              - The Air Force Audit  Agency audits      have                been generally
            effective         and the Agency has operated   independently                     in accordance
            with     auditing      standards.
                            - The Agency uses an annual                  planning       process   which
            distributes        its    resources    to provide          coverage       of major    commands,
            budqet      areas,     and initiatives      within         the Air       Force.
                        - Audits    have resulted              in substantive        changes      in Air
            Force procedures     and operations               and identified       significant
            potential   monetary    benefits    to           be realized     through       implementation
            of audit  recommendations.
                               - The Agency         could    improve  its    overall       effectiveness      by
            changing        its   philosophy         of devoting     one-half       of   its resources      to
            installation-level               audits     which would result          in   the scheduling       of
            more centrally            directed       audits.
                           - Although       Air Force Audit    Agency audit         reports    and
            working     papers    generally     comply  with   auditing       standards,     audit
            quality     could    be improved     by implementing        procedures       to ensure
            referencing       reports     to working   papers.
                       The  DOD also    concurs      that       as a general     rule,       centrally
            directed        audits   produce      more significant         audit      results      than
            audits       addressing     local     installation       issues.        It is also the DOD
            position        that,   as the sole        internal     audit    function        for the Air
            Force,       it is essential        that     the Air Force Audit            Agency provide




                   Page16                                                       GAO/APMB9@16AirForceAuditAgeney
                      B-226662




                      We met with officials from the DOD Office of Inspector General and AFAA
Agency Comments and   on November 29,1989, to obtain DOD’S official comments on a draft of
Our Evaluation        this report. DOD agreed to implement our recommendations to improve
                      planning and scheduling of audits and to improve audit quality. How-
                      ever, DOD did not agree to replace all military auditors with civilians.

                      DOD  agrees that personnel cost savings would result from converting mil-
                      itary auditor positions to civilian positions. However, baaed on the
                      assumption that military personnel would be immediately replaced,
                      without phasing in civilians, DOD believes that potential savings would
                      be more than offset over an extended period of time by (1) decreased
                      audit productivity through a loss of experienced military auditors and
                      (2) reductions in potential monetary benefits identified in AFXA audits.
                      The officials acknowledged that the entire DOD is currently undergoing a
                      detailed review of military and civilian manpower requirements to
                      determine where the Department can effectively use civilians and free
                      up military resources for combat and combat support requirements.
                      According to the officials, all Air Force military positions, including
                      those in AFAA, will be considered during the review.

                      We believe that civilian auditors could be phased into the military audi-
                      tor positions without decreasing productivity, audit benefits, or exper-
                      tise. Military auditors are qualified for other Air Force positions, such as
                      comptrollers or finance officers. The military auditors could be moved
                      into these other positions as vacancies occur. Coupled with retirements
                      and separations from the Air Force, this process could be used to phase
                      in civilian auditors without impacting productivity or potential mone-
                      tary benefits.

                      We received written agency comments on this report, and they reflect
                      the content of our November 29,1989, meeting. We have included them
                      as appendix I.

                      As agreed with your office, unless you publicly announce its contents
                      earlier, we plan no further distribution of this report until 7 days from
                      the date of this letter. At that time, we will send copies to the Director of
                      the Office of Management and Budget, the Secretary of Defense, the Sec-
                      retary of the Air Force, the Auditor General of the Air Force, and inter-
                      ested congressional committees and members of Congress. Copies will
                      also be made available to others upon request.




                      Page 14                                    GAO/AFMlM@16   Air Force Audit Agency
              independence. For instance, the Auditor General deleted contested per-
              formance standards that required civilian auditors to work toward or
              have a professional certification and to indicate a willingness to
              relocate.

              The Assistant Inspector General reported that his investigation “did not
              disclose any conclusive evidence that senior military auditors had sup-
              pressed the reporting of audit results” or that they “had not otherwise
              performed their audit work in an independent manner.” The Assistant
              Inspector General did find that various AFAAreporting practices, cou-
              pled with poor communication between senior AFAAofficials and the
              staff, led staff members to believe that improper actions were being
              taken by certain AFAA officials.

              The Assistant Inspector General recommended various policy and proce-
              dural changes, such as documenting decisions and communicating with
              audit staff, to eliminate the perception that findings, recommendations,
              and audit reports were being suppressed. The Assistant Inspector Gen-
              eral also recommended changes to AFAA policy which would reduce the
              possibility of perceived or actual impairments to AFAA independence and
              strengthen the qualifications requirements for military auditors. For
              instance, the Assistant Inspector General recommended that the Auditor
              General (1) ensure that military officers do not perform audit work at
              units to which they were previously assigned, (2) limit entry-level, mili-
              tary audit positions to officers who have the rank of captain or below
              and who are not nearing retirement, and (3) develop and use comparable
              career progression criteria for civilian and military auditors. The Audi-
              tor General generally concurred with the Assistant Inspector General’s
              recommendations. We believe the changes made and those planned in
              response to the Inspector Generals report will improve AFAA’Spersonnel
              policies and practices, if the Air Force does not replace its military audi-
              tor positions with civilian auditor positions.


              AMA audits have generally been effective and AFAAhas operated inde-
Conclusions   pendently in accordance with auditing standards. AFAA uses an annual
              planning process that results in distribution of resources to provide cov-
              erage of major commands, budget areas and initiatives within the Air
              Force. Audits have resulted in substantive changes in Air Force proce-
              dures and operations as well as in the reporting of significant potential
              monetary benefits to be realized through implementation of audit
              recommendations.



              page12
    B-236992




. Two audit reports did not meet auditing standards for evidence because
  we found insufficient support in working papers for some key state-
  ments. In these two instances, the audit managers responsible for these
  audits were unable to explain the absence of support in the working
  papers.
l Three reports contained minor discrepancies between the reports and
  the respective supporting working papers. These discrepancies generally
  involved differences in the extent of a problem or deficiency reported by
  AFAAwhich did not materially affect the validity of the finding.
l Three reports contained minor presentation errors. For instance, one
  audit report refers the reader to Schedule B-3; however, there is no
  Schedule B-3 in the audit report.

    Chapter 18 of AFU Regulation 175-102 establishes a quality assurance
    procedure to ensure the accuracy of audit reports. This procedure,
    known as referencing, requires an AFAA auditor not associated with the
    audit to review the draft audit report to verify that “specific statements
    of fact are supported by documentary evidence.”

    AFAAauditors generally do not reference draft reports to original work-
    ing papers but rather to summaries of facts prepared by the auditors at
    each audit site and/or by the audit manager responsible for drafting the
    final report. AFAAofficials told us that reports are referenced to summa-
    ries because of the difficulties in shipping original working papers from
    numerous audit sites to the responsible operating directorate. We found
    that the summaries are not referenced to working papers at the sites. We
    found instances in which discrepancies between items contained in
    working papers and items in the auditors’ summaries were repeated in
    the final audit report.

    One of the two audit reports we judged as not meeting audit standards
    for evidence was not referenced. The second report was referenced to
    the audit manager’s summary. Although certain statements in the report
    were supported in the audit manager’s summary, they were not sup-
    ported in original working papers. Of the remaining two reports in
    which we identified audit quality problems, one was not referenced, and
    the referencing on the other report appears to have been cursory, with
    no indication that the referencer had verified the accuracy of figures
    and data, as required.

    To help ensure that the referencing procedure is followed on all AFAA
    draft reports, associate directors responsible for individual audits could
    furnish written confirmation to the assistant auditors general that each


    Page 10                                   GAO/AFMD-SO-16   Air Force Audit Agency
                  B-236992




                  devoted to installation level audits varied among the area audit offices.
                  For instance, during fiscal year 1988, the area audit office at Vanden-
                  berg AFB, California, devoted 91 percent of its staff days to installation
                  level audits, while the audit staff at Hahn Air Base, Germany, devoted
                  only 10 percent of its days to installation level audits.

                  There are monetary and other benefits to be derived from both centrally
                  directed and installation level audits. Centrally directed audits were the
                  source of $294.8 million in potential monetary benefits reported in fiscal
                  year 1988, or 87 percent of AFAA’Stotal potential monetary benefits. In
                  addition, centrally directed audits have led to significant management
                  improvements in the Air Force, such as improved internal controls, con-
                  tracting procedures, and financial management systems.

                  The remaining potential monetary benefits reported by AFAA in fiscal
                  year 1988, $44.2 million, were derived from installation level audits.
                  However, 41 of the 69 area audit offices reported no potential monetary
                  benefits from installation level audits in fiscal year 1988, even though
                  these offices generally devoted over one-half of their time to this type of
                  audit. Installation level audits often resulted in improvements to local
                  administrative procedures. During our close-out conference, AFAA offi-
                  cials agreed that installation level audits do not result in the level of
                  potential monetary benefits or Air Force-wide changes that are achieved
                  through centrally directed audits. Currently, AFAAallocates its resources
                  evenly between the two types of audits without knowing whether scarce
                  audit resources are used in the best possible way. AFAA needs criteria for
                  better allocation of these resources and could consider factors such as
                  mission criticality; financial integrity; budget size; payback; and vulner-
                  ability of the activity to fraud, waste, and abuse.


                  While AFAAhad been authorized higher fiscal year 1989 staffing levels,
Use of Civilian   as of November 1988, it had 204 military officers, or approximately
Auditors Would    25 percent of the total 792 auditors, serving as auditors. However, DOD
ReduceCosts       Directive 1400.5, IX)D Policy for Civilian Personnel, states that

                  “It is the policy of the Department of Defense to use civilian employees in all posi-
                  tions that do not require military incumbents for reasons of law, training, security,
                  discipline, rotation, or combat readiness, or that do not require a military back-
                  ground for successful performance of the duties involved.”




                  Page 8                                           GAO/AFMD-90-16   Air Force Audit &ency
                    E236992




                    budget and AFAA’S resource allocations would give only an approxima-
                    tion of how audit resources should be most effectively used. AFAA offi-
                    cials told us that in determining their audit work, in addition to the Air
                    Force budget, they consider factors such as vulnerability of an area to
                    fraud, waste, and abuse; the work of other evaluation groups; the mis-
                    sion criticality of an activity; and the amount of audit resources
                    available. We agree with AFAA that any one or all of these factors might
                    be justification to adjust resources toward some areas and away from
                    others.

                    We also found that AFAA had provided audit coverage to all significant
                    procurement areas and major weapons systems within the Air Force
                    acquisition organization during fiscal years 1986-1988. During this
                    3-year period, AFAA issued 164 audit reports on acquisition areas such as
                    logistics, supply, maintenance, and weapons systems. AFAA addressed a
                    variety of issues, including requirements determination, contracting and
                    contract administration, acquisition management, and pricing. Audit
                    reports covered a number of Air Force systems in various stages of the
                    acquisition process, including the C-5, F-111, F-16, F-15, and C-141 air-
                    craft; the Maverick, Peacekeeper, and Cruise missiles; and different pro-
                    pulsion and radar systems.

                    Air Force acquisition officials told us they are satisfied with the service
                    provided by AFAA in the area of acquisition audits. These officials added
                    that AFAA’Saudit topics have been appropriate, audit coverage has been
                    adequate, audit reports have been timely, and audits have had a signifi-
                    cant impact on Air Force policy and operations.


                    AFAA’Sbasic operating philosophy is to allocate its staff days evenly
More Significant    between centrally directed audits and installation level audits. AFAA
Accomplishments     believes the installation level audits are important to local commanders
Would Be Possible   since the Air Force, unlike the Army, does not have an internal review
                    function to provide this service.:’ This philosophy actually becomes a
                    constraint on scheduling centrally directed audits to which AFAA gener-
                    ally gives higher priority. Because about half of AFAA’S resources are
                    committed to installation level audits, AFAA’S two operating directorates
                    are unable to schedule higher priority, centrally directed audits.



                    3The Navy abolished its internal review function in April 1989 and left it to the discretion of local
                    commanders whether to devote resoww~ to an internal review function.




                    Page 6                                                     GAO/AFMB96-16       Air Force Audit Agency
B236992




In reviewing AFAA’Suse of civilians and military officers in audit posi-
tions, we compared civilian and military personnel costs. Our analysis
was based on AFXA’Sroster of personnel and an Air Force pay and allow-
ance scale for military and civilian personnel.

In reviewing audit quality, we randomly selected a sample of 12 audit
reports from the 187 centrally directed audit summary reports issued
during fiscal years 1987 and 1988. We concentrated on evaluating the
(1) sufficiency of evidence in working papers, (2) accuracy of reporting
audit results, (3) development and reporting causes of problems,
(4) support for claimed monetary benefits, and (5) clarity, conciseness,
and convincingness of audit reports.

The centrally directed audit reports in our sample were issued by 8 of
the 10 divisions within AFAA. Audit work in support of these centrally
directed audits was performed in 51 of the 69 area audit offices. A total
of 87 installation level audit reports were issued as a result of audit
work done for our sample audits. We did not review the quality of the
installation level audit reports.

We also reviewed DOD, Air Force, and AFAA regulations, policies, proce-
dures, and instructions pertaining to the internal audit function and
audit quality. DOD and AFAA directives require compliance with generally
accepted government auditing standards, as contained in the Comptrol-
ler General’s Standards for Audit of Governmental Organizations, Pro-
grams, Activities, and Functions, 1981 revision. The 1988 revision to
these standards is applicable to audits conducted after January 1, 1989.

To evaluate AFXAindependence, we reviewed the reporting structure
between the Auditor General and Air Force management. We also
reviewed policy and procedural changes made as a result of the Goldwa-
ter-Nichols Department of Defense Reorganization Act of 1986. Finally,
as part of our review of the quality of individual audits, we looked for
any possible impairments to auditor independence in conducting and
reporting on the audits. We were also aware of the WD Office of Inspec-
tor General’s ongoing review of alleged impairments to AFAA indepen-
dence and use of military personnel as auditors. We received several
briefings from OIG officials regarding these issues during our review.

We performed our review between May 1988 and October 1989 at AFAA
headquarters at Norton AFB,California; the Acquisition and Logistics
Directorate at Wright-Patterson AFB, Ohio; and area audit offices at
Bergstrom Am, Texas; Randolph AFB,Texas; Nellis AFB, Nevada; Luke


page4                                    GAO/AFMDSO-16AirForeeAuditAgency
8236992




believe AFAA needs criteria to plan audits baaed on the relative merits of
each audit proposal rather than its current allocation method.

We also estimate that the Air Force could save about $2 million annually
if AFAA'S military auditor positions were replaced by civilian positions.
The savings are attributable to lower compensation for civilians at com-
parable grades. The Air Force is the only service currently using mili-
tary officers as permanent auditors in its central audit organization. The
Air Force prefers keeping military auditors to add credibility to their
reviews of military programs. However, other DOD audit organizations
and GAO do not use military auditors and still have generally recognized
credibility when they review military programs. Since the military are
assigned as permanent auditors in AFAA and are not required to rotate
into other occupations, they do not provide AFAA with expertise that
cannot be achieved with a civilian workforce. In 1977, the Air Force
agreed to implement our recommendation to convert all military auditor
positions to civilian positions, but has only reduced military officers
from one-half to one-fourth of the audit staff.”

We reviewed the audit, quality of a sample of 12 AFAA summary audit
reports and working papers from centrally directed audits and found
that 10 of the 12 audit reports generally complied with those govern-
ment auditing standards we reviewed. We found insufficient evidence in
the working papers to support key statements in two reports, which, we
therefore conclude, do not meet the standards for evidence. Based on
our review of a sample of 12 audit reports and AFXA’Sorganizational
placement, we found that AFAA has operated independently in accord-
ance with generally accepted government auditing standards.

We are recommending that the Secretary of the Air Force direct the
Auditor General to change AFAA'S method of planning audits to consider
the relative merits of each audit proposal rather than continue the cur-
rent method of allocating staff to installation level work. We are also
recommending that the Secretary convert all military auditor positions
to civilian positions and strengthen audit quality controls for AFAA
audits.

DODagreed with our findings and recommendations, except the recom-
mendation to convert all military auditor positions to civilian positions.
DODbelieves that the immediate replacement of military auditors with


'The Ar Force Audit Agmq   ('m He Made More Effertive(FGMSD    7%4,Novrmber     11. 1977).




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