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
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)