oversight

Actions Needed To Strengthen the New Defense Internal Audit Service

Published by the Government Accountability Office on 1977-01-27.

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

                         DOC'3R
                             IF    RESUHZ

00c94 - [t07511101
Actions Needed Era Strengthen the Yew Defense Internal Audit
S -vice. FGISD-77-1i: B-160759. Canuary 2', 1977. 3 pp. +
appendix (4 pp.).
Report to Secretary, Department of Defel;se, hi D. L.
Scantleuury, Directoa, Financial and Geveral management Studies
Div.
Issue Area: Internal auditing Systems: Sufficiency of Federal
    Auditors and coverage (201).
Contact: Financial and General management Studies Div.
Budget Function: miscellaneous: Financial Eanagement an.
    Information Systous (1002}; National Defense: Atomic Energy
    Defense kA'_f..vities (0:'3).
Organization Concerned: D-Eartnent of Defense: Defense Audit
    Service.
         A survey was conducted of internal audit operations of
the office of the Secretary of Defense to determine whether
internal audit operations were efficiently and effectively
carried out and whether practices and procedures contrt.ed to
standards preacr.ibed by the Comptroller General. During the
survey, the Defense Audit Service was established co carry out
functions and responsibilities previously carried out by three
other offices. Findings/Conclusions: Befcre the reorganization,
internal audit policies, plans, and operations generally
complied with requireRents for an effective internal audi.
system.   Recommendations: The effectiveness of the new interal
audit organization could be enhanced by: performing mcre reviews
in significant areas of high lev,,l defense organizations; us3ng
a sore systesatic method for following up on audit
recommendations to insure appropriate cor:rective action; and
reviewing contemplated staffing levels of the Defense Audit
Service to determine if they are adequate to maet required audit
cycles. (RRS)
 UNITED STATES
 GENERAL ACCOUNTING OFFICE




 Actions Needed To Strengthen
 The New Defense Internal
 Audit Service
 Department of Defense

The Defense Audit Service is a new Defense
agency created by combining existing internal
audit operatiu,,: of two organizations and
absorbing existing spaces from audit agencies
in the military departments.
GAO believes that the Defense Audit Service
could be te. serve departmental management
by:
    --:erforming more reviews in significant
      areas of high level Defense organiza-
      tions.
    --Using a more systematic method for
      following up on audit recommenda-
      tions.
    -- Reviewing contemplated staffing levels
      to bring required workload and capabil-
      ity of planned staff into balance.




FGMSD-77-11                                     i   2   ..   077
                            UNITED STATES GENERAL ACCOUNTING OFFICE
                                    WASHINGTON, D.C. 20548


DVISION OF PINANCIAL AND
GENERAL MANAGOMVXT MTUDIr



      B-160759

      The Honorable
      The Secretary of Defense
      Dear Mr. Secretary:

           We have completed a survey of the Office of the Secretary
      of Defense internal audit operations headed by the Deputy
      Assistant Secretary of Defense (Audit). Our objectives in-
      cluded determining whether internal audit operations were
      being efficiently and effectively carried out and whether
      the organization's practices and procedures conformed to
      standards prescribed by the Comptroller General.

           The Deputy Assistant Secretary (Audit) is responsible
      for internal audit functions assigned to the Assistant
      Secretary of Defense (Comptroller). When our survey began,
      functional responsiblities were carried out by three offices--
      Audit Operations, Audit Policy, and Audit Reports.

           During our fieldwork, the Deputy Secretary directed that
      a new agency, the Defense Audit Service, be established. The
      Defense Audit Service will combine the Deputy Assistant Secre-
      tary's audit operations with the internal audit function of
      the Auditor General, Defense Supply Agency. Also, 125 per-
      sonnel spaces are being transferred to the new service from
      the Army, Navy, and Air Force internal audit agencies.

           Since planning for the implementation of the Deputy
      Secretary's directive was still underway when we completed
      our survey, we limited our analyses of the internal audit
      function to the existing internal audit system.
           We have concluded that before the reorganization, inter-
      nal audit policies, plans, and operations generally complied
      with requirements for an effective internal audit system, and
      we have no reason to believe that the new organization will be
      any less effective. However, we believe that the effective--
      ness of the new internal audit organization could be enhanced
      by:
d-16075 9


                                          in significant areas of high
       -- Performing more reviews                such as the Joint Chiefs
           level Defense organizations,
                           the Office ofWe the      Director, Defense Re-
           of StaffandandEngineering.           noted that some reviews
           search                            level Defense offices had
           of these and other higher relatively minor functions.
           been made but limited to
                                          method for following up on
        -- Using a more systematic help insure that appropriate
           audit recommendations to
           corrective action is taken.
                                         staffing levels of the new
        -- Reviewing contemplated           get a better idea as to
            Defense Audit Service to to meet minimum required
            whether they are adequate            the Department of Defense.
            audit cycles established by
                                            to see that audit staffs are
         We believe it is important
                                       required audits within estab-
 of adequate size to perform                                   whether an
                  frames. We therefore          believe that required   audit
 lished time of       the authorized      size   can  do  the
 audit staff                                 study. These     matters  are
 work effectively, needs further    in appendix I.
 discussed in more detail
                                                   (Audit) generally agreed
         The Deputy Assistant Secretary                                  taken
                                      said that actions are being
 with our observations. HeareaL as a part of the reorganiza-
  to improve the first two                will continue to get attention
  tion and that staffing levels procedures.
  in accordance with established
                                                      contemplated can make
          We believe that the improvements
                                           more responsive to management's
  the new Defense Audit Service               However, we consider the the
            if properly    implemented.
  needs                                 of the new organization with
  matching of staffing levels
                                       critical to its success.
  size of the workload to be
                                           tIhat you assess the minimum to
          We, therefore, recommend                                    staff
                workload   and   the  capability of the planned to
   required                            appropriate consideration
   perform that work and give capability into balance.
   bringing workload and staff
                                                    Reorganization Act of
           Section 236 of the Legislative agency to submit a
                                      a Federal
   1970 requires the head of
                            oni actions   taken on     bur recommendations
               statement Senate
   written House                    Committees     on  Government Operations
   to the            and                                                   to
          later  than   60  days   after  the date of the report and the
   not                                         on Appropriations with
    the House and Senate Committees     appropriations made more thar
    agency's first request for
                                       the report. We would appreciate
    60 days after the date of statements.
    receiving copies of 'hese
                                            2
B-160759



     We are sending copies of this report to the Chairmen of
the House and Senate Committees on Government Operations,
and the Chairman of the Subcommittee on Defense, Senate
Committee on Appropriations. We are also sending copies to
the Director, Office of Management and Budget; the Assistant
Secretary of Defense (Comptroller); and the Deputy Assistant
Secretary of Defense (Audit).

     We appreciate the courtesies and coopera.ion extended to
our representatives during our survey. We shall appreciate
receiving your comments on any actions you take or plan to
take on the matters discussed in this report.
                              Sincerely yours,




                              D. L. Scantlebury
                              Director




                              3
APPENDIX I                                             APPENDIX I
                  ACTIONS NEEDED TO STRENGTHEN
              THE NEW DEFENSE INTERNAL AUDIT SERVICE
      Section 133 of th, Acounting and Auditing Act of 1950
rtade top i.a.laqement within each agency responsible for its
 internal auditing by providing that:

     "*   * * the head of each executive agency shall
     establish and maintain systems of accounting and
     internal   control designed to provide * * * effec-
     tive control over and accountability for all
     funds, property, and other assets for which the
     agency is responsible, including appropriate
     internal audit * * *."

     In the Department ol Defense (DOD), the Deputy Assistant
Secretary (Audit) is responsible for internal audit functions
assigned to the Assistant Secretary (Comptroller) by the pro-
visions of title 10, United States Code, section 136(b).   This
includes establishing policies and procedures for DOD's con-
tract and internal audit activities; providing audit service
to the Office of the Secr-tar-, Office of the Joint Chiefs
of Staff, and assigned Defense agencies; conducting audits
of DOr)-wide and other selected programs; serving as the DOD
focal point fo; liaison with GA.O, and processing GAO and
other reports for tcp management attention and timely correc-
tive %-tion. These functions have been carried out by three
offices--Audit Operations, Audit Policy, and Audit Reports.

     While our survey of the DOD internal audit system was
in process, the Deputy Secretary directed that the Defense
internal audit function be reorganized. The organizational
change established a new Defense internal audit agency that
reports directly to the Secretary of Defense with staff
supervision provided by the Assistant Secretary (Comptroller).
Personnel and audit functions of the Auditor General, Defense
Supply Agency and the Assistant for Audit Operations in the
office of the Deputy Assistant Secretary (Audit) are being
combined, reduced by 15 percent and transferred to the new
agency. Also, 125 personnel spaces are being transferred to
the new agency from the Army, Navy, and Air Force audit
organizations to perform interservice audits.

     Since reorganization had not been fully implemented
during our survey, our work was limited to the organization
existing at that time. However, we discussed our observa-
tions periodically with the Deputy Assistant Secretary to
advise him of matters we believed could be useful in estab-
lishing the new organization. The principal matters brought
to his attention are set forth below.
                               1
APPENDIX I                                        APPEEDIX I




NEED FOR MORE REVIEW OF
HIGH LEVEL DOD ORGANIZATIONS
     To be of maximum usefulness, the scope of the internal
auditor's activity should extend to all agency activities and
related management controls. The internal auditor's duties
should be clearly stated by the head cf the agency and infor-
mation concerning these duties should be disseminated through-
out the organization to insure full recognition of the nature
of his functions at all levels.

     The Deputy Assistant Secretary (Audit) has generally pro-
vided regular internal audit coverage to the larger Defense
agencies.
     We noted, however, that only three reviews of the Office
of the Joint Chiefs of Staff activities had been made during
fiscal years 1974 through 1976 and these were of relatively
minor functions. Two of the reviews were audits of the Chair-
man's dining roo.: and the third was a review of the welfare
and recreation association. There were no reviews cf the
Office of the Director, Defersc Research and Engineerink;
Assistant s=cretary of Defense for Manpower and Reser'.e
Affairs; and other high level Defense offices.
     The Deputy Assistant Secretary said that audit coverage
of these offices has been limited in the past because of the
size of the audit workload and shortfalls in staffing. He
also said that although he had conducted audits of components
of the Office of the Secretary of Defense, more could be done.
He said that he plans to take advantage of the increased size
of the new organization to make such reviews.
NEED TO IMPROVE
REPORT FOLLOWUP SYSTEM

     Our guidance on internal auditing in Federal agencies
recognizes that primary responsibility for action and followup
on audit recommendations rests with management. Provision
should be made for regular inquiry into whether proposed cor-
rective actions have, in fact, been taken and their effective-
ness. Status reports on such actions should be prepared for
management officials and internal auditors. Where operating
officials disagree with the internal auditors' recommenda-
tions, a mechanism should be established to reconcile the
differences or to call for a decision at a higher management
level.


                               2
APPENDIX I                                        APPENDIX I




     Department of Defense Instruction 7600.3, amended
November 28, 1975, specifies that an independent office
should be assigned responsibility for monitoring action
taken on audit findings and recommendations, maintaining
time schedules for responding to and acting on recommenda-
tions, keeping a record of the disposition of recommenda-
tions, and submitting periodic reports to top management
on problem areas needing management attention.
     The system for followup was inadequate at *he time of
our survey. Although the Deputy Assistant Secretary had
provided for some followup and status reporting by the
internal audit staff on recommendations where the dollar
impact was $100,000 or more, followup was not systematic,
and there was no assurance that it would be accomplished
even on significant matters. For example, in two fiscal
year 1975 cases, there was no evidence that followup had
been made, c en though the auditors estimated potential
savings of $836 million. We also noted that certain DOD
components were not always responding to final reports In
a timely manner.
     The Deputy Assistant Secretary (Audit) said that he
plans to augment the staff of the Assistant for Audit Reports
to monitor the disposition of all audit recommendations to
comply with the amended DOD instruction. We believe that
this new emphasis should help insure that the full benefits
of audit recommendations are realized.
AUDIT STAFF MAY
BE SHORT HANDED
     The irternal auditors responsibilities to management are
broad. They can and should cover every facet of all agency
activities and related management ccntrols.  To do this, the
audit organization should be properly staffed with sufficient
personnel to do the job.
     Before the reorganization was announced in August 1976,
the Deputy Assistant Secretary (Audit) had about 90 staff
members 4 n his office of audit operations. We noted that in
forecasting their annual 1976 workload, before the reorgani-
zation, the Office of Audit Operations had recorded signifi-
cant staffing shortfalls as compared with workload require-
ments as follows:



                              3
APPENDIX I                                          APPENDIX I




                                               Fiscal years
                                        1976                  1975

Total estimated annual workload in
  staff years                           295                    254
Less: direct staff years available       64                     68

Estimated staff shortage                231                    196

     In our report to the Congress, "Suggested Improvements
in Staffing and Organization of DOD Top Management Headquar-
ters in che Department of Defense" (FPCD-76-35), dated
April 20, 1976, we noted that the internal audit staff could
cover only a part of their workload responsibilities. We
also pointed out that without a detailed functional analysis,
efforts to streamline headquarters can overburden, frustrate,
and demoralize staff unless the workload decreases along with
staff reductions.
     Under the reorganization, the Defense Audit Service was
given more responsibility. It included not only the work
of the old office of audit operations and the staff of the
Defense Supply Agency but also a broader responsibility for
conducting DOD-wide reviews. Before the Defense Audit Serv-
ice got underway, its staff was reduced by 15 percent. We
believe this reduction was made without a careful determina-
tion of whether the staff was adequate to perform the assigned
workload.
     Because the reorganization was new, we did not have the
information necessary to compare workload and staff size.
However, since the old office of audit operations was so
badly understaffed, it appears likely that the new organiza-
tion might have the same problem.

RECOMMENDATION

     We recommend that the secretary of Defense assess the
minimum required workload and the capability of the planned
staff to perform that work and that appropriate consideration
be given to bringing workload and staff capability into
balance




                              4