oversight

Need for More Effective Cross-Service Auditing Arrangements

Published by the Government Accountability Office on 1977-09-26.

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

                         DOCUMENI   RESUME

03461 - [A27239453

Need for More Effective Cross-Service Auditing Arrangements.
PGMSD-77-55; B-176544. September 26, 1977. 19 pp. + appendix (1
pp.).
Report to Bert Lance, Director, Office of Management and Budget;
by D. L. Scantlebury, Director, Financial and General Management
Studies Div.
Issue Area: Internal Auditing Systems (200); Internal Auditing
    Systems: Audit Agencies' Work Coordination and Cooperation
      I20) , :
Contact: Financial and Ceneral Management Studies Div.
Budget Function: Miscellaneous: Financial Management and
    Information Systems (1002).
Organizaticn Concerned: Department of Labor; Dep.rtment of
    Health, Education, and Welfare; Department of Housing and
    urban Development; Civil Service Commission.
Authority: Accounting and Auditing Act of 1950 (31 U.S.C. 66a).
    Federal Management Circular 73-2.
         Federal Management Circular 73-2 requires that when two
or more Federal agencies assist the same organization. they
should consider establishing cross-service arrangements under
which one Federal agency audits for the other. Such arrangements
can conserve manpower, promote efficiency, and minimize the
impact of audits on the operations of the auditee. However, the
Federal agencies are not using cross-service arrangements to the
maximum ext'nt possible. This results in duplicate audit effort,
a waste of time and money, and the interruption of program
personnel work. Findings/Conclusions: Barriers which inhibit
cross-service auditing include: lack of Federal-wide funding
information on grantees; limited Federal audit staffs; lack of
reimbursement procedures; the large number of Federal programs;
and the lack of a standard audit guide which covers multiple
programs and funding sources. Rerommendations: The Office of
Management and Budget should assess the feasibility and
practicability of establishing a system to identify grantees
which receive funds frcm several Federal agencies or under
several federally assisted programs. Once these grantees are
identified, CMB can work with the Federal grantor agencies to
alleviate the cther barriers to cross-servic- auditing. OMB
should revise its administrative requirements for Federal grants
to require that periodic audits encompass all Federal fundings
received by a particular grantee and that copies of audit
reports and related correspondence be furnished by the audit
organizaticn to each funding source. (Author/SC)
 UNITED STATES
 GENERAL ACCOUNTING OFFICE




Need For More Effective
Cross-Service Auditing
Arrangements
Office of Management and Budget
Federal Management Circular 73-2 requires
that, when two or more Federal agencies as-
sist the same organization, they should con-
sider establishing cross-service arrangements
under which one Federal agency audits for
the other. Such arrangements can conserve
manpower, promote efficiency, and mini-
mize the impact of audits on the operations
of the auditee.
The Federal agencies are not using cross-serv.
ice arrangements to the maximum extent
possible. This can result in duplicate audit
effort, a waste of tire3 and money, and the
interruption of program personnel work.
Critical to further implementation of the cir-
cular is the establishment of a system for
identifying grantees that can be audited un-
der cross-service arrangements. GAO recom-
mends that the Office of Management and
Budget assess the feasibility and practicabil-
ity of establishing a system to identify
grantees that receive funds from more than
one Federal agency or under more than one
federally assisted program.

FGMSD-77-55                                      SEPTEMBER 26, 1977
                             UNITED STATES GENERAL ACCOUNTING OFFICE
                                     WASHINGTON, D.C.   20548


DIVISION OF FINANCIAL AND
GfNERAL M(ANA-GEMETSTUDIES

      B-176544



      The Honorable Bert Lance
      Director, Office of Management
        and Budget
      Dear Mr. Lance!

           This report discusses the extent to which selected
      Federal agencies have implemented Federal Management Circular
      73-2 as it relates to cross-service auditing.

            This report contains recommendations to you which are
      set forth on page 18. As you know, section 236 of the Legis-
      lative Reorganization Act of 1970 requires the head of a
      Federal agency to submit a written statement on actions taken
      on our recommendations to the House Committee on Government
      Operations and the Senate Committee on Governmental Affairs
      riot later than 60 days after the date of the report and to
      the House and Senate Committees on Appropriations with the
      agency's first request for appropriations made more than 60
      days after the date of the report.

            We are sending copies of this report to the Chairmen of
      the House Committee on Government Operations and the Senate
      Commit'tee on Governmental Affairs, the Chairmen of the House
      and Senate Committees on Appropriations, and the Chief of your
      Financial Management Branch.

           We are looking forward to receiving your comments con-
      cerning the matters discussed in this report.
                                                Sincerely yours,



                                                D. L. Scantlebury
                                                Director
GENERAL ACCOUNTING OFFICE                 NEED FOR MORE EFFEC-
REPORT TO THE DIRECTOR, OFFICE            TIVE CROSS-SERVICE
OF MANAGEMENT AND BUDGET                  AUDITING ARRANGEMENTS
                                          Office of Management
                                            and Budget
           DIGEST

          When two or more Federal Lagencies provide
          assistance to the same organization, Federal
          Management Circular 73-2 reguirei that they
          consider establishing cross-service arrange-
          ments under which one Federal agency audits
          for the other. Such arrangements can conserve
          staff resources, promote efficiency, and mini-
          mize the impact of audits on the operations
          of the auditee.
          Federal agencies have worked ouc many cross-
          service auditing arrangements over the last
          few years. They are also cooperating with
          the intergovernmental audit forums to test
          the single audit approach for grantees re-
          ceiving funds from several Federal agencies.
          However, much work lies ahead to fully im-
          plement Circular 73 2 as it relates to cross-
          servicing because Federal agencies are nut
          using these arrangements to the maximum extent
          possible. This can result in duplicate audit
          effort with its accompanying waste of time and
          money, and the interruption of the work of
          program personnel.

          GAO did not determine if audit duplication had
          actually occurred or, if so, whether it could
          have been avoided. However, many of the steps
          performed during a grant audit pertain to the
          grantee's accounting system and the internal
          controls built into that system rather than
          to 'he individual grants. This is the area
          in which the various audits are duplicative.

          GAO identified several barriers which inhibit
          additional cross-service auditing including
          (1) lack of Federal-wide funding information
          on grantees, (2) limited Federal audit staffs,
          (7) lack of reimbursement procedures, (4) the
          large number of Federal programs, and (5) the
          lack of a standard audit guide which would
          cover multiple programs and funding sources.

                                                   PGMSD-77-55
   Wt5f
    . Upon removal. the renort    i
   dote should be noted hereon.
There are several ongoing efforts aimed at
overcoming the barriers to further cross-
service auditing. These efforts include a
Joint Financial Management Improvement Prograk'
project which is directed toward studying the
problem of reimbursing State and local audi-
tors for auditing federally assisted programs
and the development of a common financial
audit gjide for federally assisted programs.
However, the Office of Management and Budget
needs to work with the agencies to help iden-
tify and overcome barriers to effective cross-
servicing as contemplated by Circular 73-2.
Critical to effective implementation of the
circular is the establishment of a system for
identifying grantees that can be audited under
cross-service agreements. Such a systeli is
needed LO identify grantees that receive funds
from rore than one Federal agency or under
more than one federally assisted program. To
date, the Federal agencies have not estab-
lished such a system.

RECOMMENDATIONS

GAO recommends that the Office of Management
and Budget assess the feasibility and practica-
bility of establishing a system to identify
grantees which receive funds from several Fed-
eral agencies or under several federally as-
sisted programs. Once these grantees are
identified, the Office of Management and Budget
can work with the Federal grantor agencies to
alleviate the other barriers to cross-service
auditing.
GAO also recommends that the Office of Manage-
ment and Budget revise its administrative re-
quirements for Federal grants to require :hat
periodic audits encompass all Federal fund~lags
received by a particular grantee and that
copies of audit reports and related correspon-
dence be furnished by the audit organization
to each funding source.

AGENCY COMMENTS

The Directors of Audits of the Departments of
Labor and Health, Education, and Welfare; the
Environmental Protection Agency; the Community

                       ii
          Services Administration; and the Inspector Gen-
          eral of the Department of Housing and Urban
          Development generally agree with the conclu-
          sior' and recommendations of this report.

          An official of the Office of Management and
          Budget stated that it hesitates to make any
          study of systems to identify grantees receiv-
          ing funds from several Federal agencies pend-
          ing the outcome of an ongoing Audit Improve-
          ment Project of the Joint Financial Management
          Improvement Program and several draft GAO re-
          ports dealing with audit. The Audit Improve-
          ment Project will review possible duplication
          and overlap, possible lack of audit coverage,
          and coordination of audits.

          We do not believe tnhu the outcome of the Au-
          dit Improvement Project or the GAO reports
          will alter the need to identify the universe
          of multifunded grantees where cross-servicing
          would be feasible and advantageous. Estab-
          lishing such a system is the first step to
          effective cross-service auditing.
          The need for such a system was reinforced by
          the Director of Audits of one Federal agency.
          who wrote in response to this report:
          "Unless we are willing to reconcile ourselves
          to a case-by-case canvassing of grantees and
          contractors (and subgrantees of various
          levels), and forced reliance on the data so
          obtained, we must aim for a centralized Fed-
          eral system to provide this information. We
          feel that this conclusion is unavoidable, and
          that such an effort, despite the many diffi-
          culties involved, would be well worth its
          cost."




ITeLaSr                         iii
                         C o n t en    t s

                                                         Page
DIGEST                                                     i
CHAPTER

  I        INTRODUCTION                                    1
               Audit standards                             1
               Scope of review                             2

  2        NEED FOR MORl EFPECTI!E CROSS-SERVICE
             AUDITING                                      4
               Federal Xsnac,ement Circular 73-2           4
               Audit forums and the single audit
                 approach                                  6
               Need for more cross-service auditing        7

  3        BARRIERS PREVENTING FURTHER CROSS-SERVICE
             AUDITING                                     15
               Lack of Government-wide funding infor-
                 mation by grantee                        15
               Limited audit staffs                       16
               Lack of reimbursement procedures           16
               Number of programs                         1.6
               Standard audit guide                       16
  4        CONCLUSIONS AND RECOMMENDATIONS                18
               Conclusions                                18
               Recommendations                            18

  5        AGENCY COMMENTS                                19

APPENDIX

  I        Massachusetts organizations receiving more
             than one Federal audit during fiscal year
             1975                                         20

                             ABBREVIATIONS

C.PA..     certified public accountant

CSA        Community Services Administration

DCAA       Defense Contract Audit Agency

DOL        Department of Labor
DOT    Department of Transportation
EPA    Environmental ProtecAion Agency
FMC    Federal management circular
GSA    General Services Administration
HEW    Department of Health, Education, and Welfare
HULD   Crpartment of Housing and Urban Development
OEO    Office of Economic Opportunity
OMB    Office of Management and budget
EDA    Economic Development Administration
NYC    Neighbor Youth Corps
                         CHAPTER 1
                       INTRODUCTION
     The Accounting and Auditing Act of 1950 (31 U.S.C. 66a)
requires the head of each agency to establish and maintain
systems of accounting and internal control designed to provide
effective control over and accountability for all funds, prop-
erty, and other assets for which the agency is responsible.
An integral part of such a system is internal auditinq, which
uniquely supplements routine management controls through its
independent approach and review methods. Internal auditing
includes the so-called "external" auditing of Federal assis-
tance to State and local governments whether performed by
Federal auditors or carried out by State and local auditors
or independent public accountants under the direction of
Federal auditors.

     Federal assistance to State and local governments ex-
panded dramatically during the 19C0s.  The 1974 Catalog of
Federal Domestic Assistance lists 975 assistance programs
administered by 52 Federal agencies. Most of these programs
are available to the 50 States and nearly 60,000 units of
local government. Federal assistance to State and local
guvernments increased from $6.7 billion in fiscal year 1959
to an estimated $51.7 billion in fiscal year 1975. As a per-
centage of total domestic Federal outlays this assistance
increased from 15.9 percent in fiscal year 1959 to an esti-
mated 24.7 percent in fiscal year 1975. During fiscal year
1975, Federal assistance supported an estimated 22 percent
of State and local expenditures.

     This -rowth in "Fderal assistance programs necessitated
rPeeral agency i nt' nal audit organizations to devote more
of their resourc-e  tso external auditing. Legislation estab-
lishing a grant proqram often contains a requirement that
the program be audited at certain specified irnte;vals, such
as every 2 years. 7Te internal audit offices of several
grantor agencies r.-port that they spend as much as 6C to 80
percent of their time either monitoring and reviewing the
audits of State and local auditors and independent public
accountants or performing such external audits themselves.

AUDIT STANDARDS

     In addition, our "Standards for Audit of Governmental
Organizations, Programs, Activities & Functions," issued in
'972, increased the internal auditor's work by broadening the
scope of his effort beyond the financial audit to include


                             1
compliance auditing and auditing for economy, efficiency,
and achievement of program results. The Standards define such
auditing as follows:
     1.   Financial and compliance--determines whether
          (1) financial operations are properly conducted,
          (2) the financial reports of an audited entity are
          presented fairly, and (3) the entity has complied
          with applicable laws and regulations.
     2. Economy and efficiency--determines whether the
        entity is managing or utilizing its resources, such
        as personnel, property, and space in an economical
        and efficient manner and the causes of any ineffi-
        ciencies or uneconomical practices, including
        inadequacies in management information systemicas,
        administrative procedures, or organizational struc-
        tures.
     3.   Program results--determine whether (1) the desired
          results or benefits are being achieved, (2) the
          objectives established by the legtJa2.ure or other
          authorizing bc:dy are being met, ard (3) the agency
          bas ;onsiled alternatives which might yield de-
          sired results at a lower cost.
     Cross-service auditing arrangements, under which one Fed-
eral agency conducts audits for another, can be used to help
internal audit organizations meet this increased responsibil-
ity. The requirement for entering into cross-service ar-
rangements is contained in the September 27, 1973, Federal
Management Circular (FMC) 73-2, Audit of Federal Operations
and Programs by Executive Branch Agencies. The circular
provides that when two or more Federal agencies are respon-
sible for programs in the same organization, they give full
consideration to establishing cross-service arrangements.
SCOPE OF REVIEW
     We made our review at the regional audit offices of
the Departments of Health, Education, and Welfare (HEW)! Labor
(DOL)L Transportation (DOT); Housing and Urban Development
(HUD); the Environmental Protection Agency (EPA)! the Commu-
nity Services Administration (CSA) located in Federal Regions
I (Boston) and VI (Dallas); and the Boston audit office of
the Federal Highway Administration (FHWA). We also visited
or contacted organizations which received funds from several
Federal agencies or under several federally assisted programs
to determine the extent of Federal audits performed.

                              2
     Our review was made to determine the extent to which the
selected Federal agencies have implemented FMC 73-2 as it re-
lates to cross-service auditing arrangements. We did not re-
view the adequacy or the scope of the audits performed, the
monitoring of the audits, or the corrective action taken
as a result of the audits.




                              3
                          CHAPTER 2
             NEED FOR MORE CROSS-SERVICE AUDITING
     Seven Federal departments or agencies--HEW, Treasury,
Agriculture, Transportation, HUD, EPA, and Labor--are re-
sponsible for administering over 90 percent of the estimated
Federal assistance provided to State and local governments
in fiscal year 1975. In many instances two or more of these
departments or agencies provide assistance to the same State
and local units of government.

     Each of the departments and agencies is responsible for
providing adequate audit coverage of their programs. Federal
policy requires that, when two or more Fedoral agencies pro-
vide assistance to the same organization, tiey consider estab-
lishing cross-service arrangements. However, the Federal
agencies are not using .ross-service arrangements to the
maximum extent possible. This can result in duplicate audit
efforts, a waste of time and money, and the interruption of
the work 'of program personnel.

     We did iot determine if audit duplication had actually
occurred or, if so, whether it could have been avoided. How-
ever, many of the steps performed during an audit of a grant
pertain to the grantee's accounting system and the internal
controls built into that system rather than to the individual
grants. This is the area in which the various audits are
duplicative.

     We identified several barriers which inhibit additional
cross-service auditing including (1) lack of Federal-wide
funding information on grantees, (2) limited Federal audit
staffs, (3) lack of reimbursement procedures, (4) the large
number of Federal programs, and (5) the lack of a standard
audit guide which would cover multiple programs and funding
sources. These barriers are discussed in chapter 5.
FEDERAL MANAGEMENT
CIRCULAR 73-2

      After the Subcommittee on Intergovernmental Relations,
SenatL committee on Government Operations, disclosed a series
of widespread deficiencies in auditing federally assisted
programs, the Bureau of the Budget, now the Office of Manage-
ment and Budget (OMB), issued Circular A-73 in 1965 to en-
courage intergovernmental audit coordination and to set forth
Federal policies to be followed in auditing Federal grants
to State and local governments. The circular provided, in


                             4
part, that each grantor agency fully consider establishing
crss-service arrangements when such arrangements are in
tht best interests of tne Federal Government and the grantee.
Responsibility for administering the circular was reassigned
from OMB to General Services Administration (GSA) by a May 9,
1973, Executive order.

     On September 27, 1973, GSA issued Federal Management
Circular 73-2, Audit of Federal Operations and Programs by
Executive Branch Agencies, which superseded OMB's Circular
A-73. This circular sets forth policies to be followed
in auditing Federal operations and programs. Its primary
objectives are to promote improved audit practices, achieve
more efficient use of staff, improve coordination of audit
efforts, and emphasize the need for early audits of new
and substantially changed programs. The following guidance
is provided concerning cross-service arrangements.

     "To conserve manpower, promote efficiency, and mini-
     mize the impact of audits on the operations of the
     organizations subject to audit, each Federal agency
     will give full consideration to establishing cross-
     servicing arrangements under which one Federal agency
     will conduct audits for another--whenever such al-
     rangements are in the best interest of the Federal
     Government and the organization being audited. This
     is particularly applicable in the Federal grant-in-
     aid and contract programs where two or more Federal
     agencies are frequently responsible for programs in
     the same organization or in offices located within
     the same geographical area. Under such circum-
     stances, it will be the primary responsibility of
     the Federal agency with the predominant financial
     interest to take the initiative in collaborating
     with the other aporopriate Federal agencies to
     determine the feasibility of one of the agencies'
     conducting audits for the others, and to work out
     mutually agreeable arrangements for carrying out
     the requireci audits on the most efficient basis."

Responsibility for administering FMC 73-2 was reassigned to
OMB by an Executive order dated December 31, 1975.

     Progress has been made in the use of cross-service
arrangements. For example, in response to out April 1974
report "Increased Intergovernmental Cooperation Needed for
More Effective, Less Costly Auditing of Governmental Pro-
grams," B-176544, which dealt mostly with the lack of coor-
dinated Federal or State audits, GSA stated in part


                             5
     "* * * we believe the report should give more recogni-
     tion to some of the cross-servicing arrangements that
     have been worked out in conjunction with the Federal
     agencies over the last few years. For example, the
     Integrated Grant Administration (IGA) Program which is
     currently underway provides for one agency to be respon-
     sible for the audit of the IGA grantee. For over 2,000
     educational institutions, a cognizant Federal agency was
     designated to conduct the audit for all agencies at a
     single institution. For State and local governments,
     similar arrangements were made for the audit of indirect
     costs under grant programs. As of now, individual agen-
     cies are cognizant for all States and about 450 State
     agencies and for about 1,000 of the larger counties,
     municipalities and townships. About 37,000 smaller units
     of local government were instructed to make arrangements
     for audit with the Federal agency with which they do
     the most business. All school districts, over 21,0C0,
     were assigned to the Department of Health, Education,
     and Welfare. Cognizance assignments were made also
     for over 6,700 special districts."
AUDIT FORUMS AND THE
SINGLE AUDIT APPROACH

     The intergovernmental audit forums at the national and
regional levels have also been actively promoting coordinated
audits. The forums, which are composed of Federal, State, and
local government auditors, serve as a means of bringing to-
gether persons who can work out solutions to audit problems
advanced by any governmental unit. The objectives of the
forums include encouraging coordination of audits and promoting
the kind of understanding and communication that will result
in cooperative audit work and mutual reliance on audits per-
formed by others. The forums have no decisionmaking au-
thority to bind the Federal agencies or State and local gov-
ernments representedj however, all members support a policy
of cooperation and coordination.

     Several audit forums are organizing cooperative audits
of grantees which receive funds from more than one Federal
or State agency. For example, the Southwest Intergovern-
mental Audit Forum, which is composed of Federal, State, and
local audit organizations located in Arkansas, Louisiana,
New Mexico, Oklahoma, and Texas, is organizing a cooperative
audit of a lont:oolitan planning organization after a Fed-
eral Highway Administration survey disclosed that some of
these organizations are funded by as many a.J 10 different
departments. The survey also showed that most metropolitan

                            6
planning organizations are not only audited annually by cer-
tified public accountants (CPAs) but are also audited by
Federal and State funding agencies. One such organization
had 10 different Federal and Svate audits in less than a
12-month period. In addition, the Mid-America Inter-
governmental Audit Forum is attempting to test the single
audit approach in a cooperative audit of the Mid-America
Regional Council, which is funded by several Federal agen-
cies.
NEED FOR MORE CROSS-
SERVICE AUDITING
     In spite of the progress that has been made, we believe
much work lies ahead to fully implement the intent of Circular
73-2 as it relates to cLoss-service arrangements. In the
Boston and Dallas regions we identified several orgr'izations
which received funds from multiple Federal agencies ad which
were audited by the different Federal agencies involved. In
addition, a recent case study showed that one multiple-funded
grantee received at least 67 audits during a 7-year period.
Details are as follows.
Texas
     In Federal Region VI we reviewed the audits performed
at 16 organizations that are located in Texas and received
grants from more than one Federal agency or under more than
one federally assisted program and found the following.
     The Texas Department of Community Affairs, as of December
1975, administered 33 Federal grants valued at over $71 mil-
lion. These funds were provided directly by seven Federal
agencies and indirectly by two other Federal agencies through
two State agencies. Between April 1975 and March 1976 the
following audits of Federal programs were performed.




                             7
                             Administering                         Grant period
          Program               agency           Auditor
     Various employment          DOL         certified public     A/1/73   12/31/75
       programs                                accounting firm
      Head Start                 HEW         certified public     4/1/74    3/31/75
                                               accounting fir,
     Special teclnicel           CSA         certified public     9/1/74    8/31/75
       assistance and                          accounting firm
       emergency food
       and medical service
     Model cities State          HUD                SUD          6/23/70   12/31/74
       assistance team
     Community development       HUD                HUD           7/1/73   6/30/74
       training program
     Personnel admin-        Civil Service   certified public    10/)/74   9/30/'6
       istration               Commission      accounting firm

      In addition to these aud ts performed by or for Federal
agencies, the Texas State Auditor also examined the financial
 tFatements of the various funds and account groups of the
Department. His last audit covered the 2-year period ending
August 31, 1974. Finally, a certified public accounting firm
engaged by the Governor's Committee on Aging examined the De-
partment's interagency contracts for the period from Septem-
ber 1, 1974, through Junre 30, 1975. Thus In approximately
1 year, the Department was subjected to 8 different audits,
5 of which were conducted by certified public accounting
firms, 2 by Federal auditors, and 1 by the Texas State Audi-
tor.   Most of these were financial and compliance audits.

     Our review at the 15 other organizations showed that they
were funded by from 1 to 7 Federal agencies and 1 'o 8 State
agencies. An average of 3 Federal and 3 State agencies pro-
vides funds to each organization. A total of 7 Federal agen-
cies, 6 State agencies, and 15 certified public accounting
firms audited these 15 organizations.

     At the Alabama Coushatta Reservation we found that a
certified public accounting firm was engaged to audit the
grants provided by the Economic Development Administration
and HEW, while HUD auditors examined its housing program grant
and the Texas State Auditor performed an annual financial au-
dit. At the Galveston County Community Action Council, DOL
audited its Neighborhood Youth Corps Program, the Department
of Agriculture audited its Summer Feeding Program, and two
certified public accounting firms reviewed aspects of HEW's
Headstart Program. At the Pan American University three
certified public accounting firms audited the various HEW and
DOL programs while the State auditor performed an annual fi-
nancial audit and the Texas Department of Public Works audited
the university's community services program.

     The following table summarizes the audits performed at
12 of the other organizations.
                                                Audits of Federal
                         Annual audit          erogma_ perfortmed        Audits performed           Totr.l
   Grasntee              Pfte9[m!dL by          ey            -Ki        byta.s   a-ie              audit&
South Plains           certified public    certified public   CSA    Department of Public Welfare     5
  Community Action       accounting firm     accounting firma        Jepartment of Community
  Assaoc.. Inc.                                                        Affairs
                                                                     Commission on Alcoholism
Economic Opportunity   certified public          DOL           D'L   Department of Public Works       4
  Development Corp.      accounting firm         EDA           ECk
  of Hidalgo County
Economic Opportunity   certified public          DOL           DOL   Department of Public Works
  Development Corp.                                                                                   3
                         accounting Z:..
  of San Antonio&
  Bexer
Big Boend Community    certified public                        HEW           -1
  Action Committet       accounting firm
Texar Panhandle        certified public           -             -            -
  Community Action       accounting firm
  Corp.
Dallas County mental   certified public         HEW            HEW                                   2
 Health & Mental         accounting firm
 Retardation Center
Tom Green County       certified public                        HEW           -1
  Community Action       accounting firm                       CSA
  Council
Texas Commission       State Auditor       certified public Labor                                    2
  for Indian Affairs                         accounting firm
Coastal 8end Man-      certified public
  power Consortium       accounting firm
Weost Texas Council    certified public          -                   State Committae on Aging        2
  of Covernment          accounting firm
City of Dallas         certified public         HUD           HUD    Governors Office on Traffic     6
                         accounting firm        EPA           EPA      Safety
                                                HEW           HEW
                                           certified public    DOL
                                             accounti;g firm
Community Action       certified public    Agriculture     Agriculture                               2
  Council of South       accounting firm
  Texas
Massachusetts

     In Massachusetts the situation was similar to that in
Texas. That is, in cases where more than one Federal agency
provides funds to a grantee, the grantee is audited by more
than one Federal agency or a certified public accounting firm
hired by that agency. In total, we identified 30 organiza-
tions that received funds and were audited by more than one
Federal agency during fiscal year 1975. (See app. I.)

     Three Federal agencies--HEW, CSA, and DOL--have been
providing funds to Action, Inc., of Gloucester. The grants of
each of these agencies were audited by different certified
public accounting firms as follows.

                                         Period covered
  Agency            Program          _             audit
   HEW             Head Start            9/01/72    to 8/31.'73
                   Head Start            9/01/73    to 8/31/74
   CSA                                   9/01/72    to 8/31/73
                                         9/01/73    to 8/31/74
   Labor           JOBS                  8/02/71    to 2/02/73
                   JOBS                  7/14/72    to 11/14/74
                   NYC                   6/01/72    to 6/30/73
                   NYC                   7/02/73    to 7/02/74
                   NYC                   7/11/73    to   9/1/73
                   NYC                   7/15/73    to 6/30/74

     We were unable to determine with certainty when the audits
were actually performed; however, it appears that the audits of
both HEW grants were completed in September and October 1974,
that the audit of the second CSA grant was completed in May
1975, and that the audit of all of DOL's grants occurred in
fiscal year 1975. The important element, however, is that all
three agencies provided funds to the grantee during essen-
tially the same time period; yet each used a different certi-
fied public accounting firm to audit its grants. At the Com-
munity Action Committee of Cape Cod & Islands, Inc., Hyannis,
Massachusetts, both the CSA and HEW grants covering the period
January 1, 1973, to December 31, 1974, were audited by a dif-
ferent certified public accounting firm.

     These two preceding examples are unusual because we found
in most cases when HEW and CSA provided funds to the grantee,
one certified public accounting firm audited the grants of
both. For example, appendix I shows that CSA and HEW used the
same firm to audit their grants at 11 of the Massachusetts
grantees included in our review. The two examples, however,
point out that additional cross-servicing may be possible.
                                10
Family Health Foundation

     In July 1976 we issued a report (B-164031(5) entitled
"Administration of Federal Assistant Programs--a Case Study
Showing Need for Addition-'. Improvements" which dealt in part
with the need for more effective audit coverage of Federal
grants. This case study concerned the Family Health Founda-
tion which obtained Federal funds over a 7-year period to
provide family planning and other health services. As a re-
sult of several public allegations that the Foundation im-
properly managed Federal funds, HEW--the primary Federal
funding agency--audited its fundings. In addition, a Federal
grand jury indicted some Foundation officials, and a Federal
court placed the Foundation in receivership.

      We included excerpts from this report because, we believe,
they illustrate to the extreme the need for an effective coor-
dinated audit of all Federal funds received by a grantee and be-
cause the Office of Management and Budget (OMB) did not agree
with the recommendation that administrative regulations for
Federal grants be revised to require that periodic audits en-
compass all Federal funding received by a grantee. OMB dis-
agreed with this recommendation on the basis that considerable
progress has been made in making single agencies aware of the
necessity to audit all grants to educational institutions and
to negotiate and audit overhead costs for all States and many
local governments. OMB added that this is being done to make
them comply with existing Government-wide policy that the Fed-
eral agency with the predominant financial interest take the
initiative to determine the feasibility of having one agency
do the auditing for the others. OMB believes a continued ef-
fort is needed to determine, in a practical way, the single
agency best equipped to audit a given situation or a given
area.

     From its inception until it was placed in receivership in
May 1974, the Foundation obtained at least $53.6 million in
Federal funds under 10 assistance programs administered by 9
Federal agencies. It obtained about $17 million directly
through grants and contr:acts with Federal agencies and about
$36.6 million indirectly from Federal agencies through grants
and contracts with 12 public and private intermediary organ-
izations.

     According to HEW's audit report, the Foundation did not
have an effective system of acccinting and internal controls
over the use of Federal funds. Many factors, including fiscal
monitoring and auditing, which were neither effective nor
prompt, enabled the Foundation to circumvent limitations on
the use of Federal funds and to improperly obtain Federal
funds.

                             11
     We pointed out in our case study that the provisions of
Circular 73-2 relating to cross-service auditing were not
followed and as a result;

     -- Generally only piecemeal assessments were made of the
        Foundation's management of Federal funds from various
        sources.

     -- Funds provided under a single grant were audited
        more than once.

     -- Several audit organizations simultaneously audited
        Foundation activities.

At least 67 audits of various Foundation grants were made by
Federal, State, and local government audit organizations and
independent public accounting firms since the Foundation was
established. Sixty-four of the audits dealt with Federal
grants and three with non-Federal grants. Most of the audits
dealt with a single grant and covered just one grant period.
Forty-six of the 58 single-grant audits by independent public
accounting firms were of Office of Economic Opportunity (OEO)
grants.

     Only 13 of the 67 audits resulted in reports which dis-
closed questions about or deficiencies in the Foundation's
fiscal management. The more significant deficiencies and
questioned costs were disclosed in the six audit reports is-
sued beginning in 1973--after allegations of the Foundation's
mismanagement of Federal funds had surfaced. Of these six,
the two most important dealt with multiple grants--one was
the report issued by the HEW Audit Agency and the other was
the second of two multiple-grant audit reports issued by an
independent public accounting firm.

     As a result of our study, we recommended in part to OMB
that the proposed uniform administrative requirements for
Federal grants, contracts, and other agreements be revised
to require that periodic audits encompass all Federal funding
and that copies of audit reports and related correspondence
be furnished by the audit organization to each funding source.

     OMB concurred with the objective of our recommendation
but stated that it did not believe it necessary to include the
requirement in the uniform administrative requirements.

    OMB stated

    "* * * Federa'. Management Circular 73-2 already promul-
    gates a Goverument-wide policy that a Federal agency with

                             12
     the predominant financial interest in an organization
     funded by multiple Federal agencies should take the
     initiative to determine the feasibility of one agency
     auditing for the others.     Towards this end, we have been
     working on a continuing basis with the major grantmaking
     agencies. For example, single agency cognizance has
     been worked out for the audit for all grants to over
     2,100 educational institutions as well as for the nego-
     tiation of their overhead rates. Single agency cogni-
     zance has been established for the negotiation and
     audit of overhead costs in all States, State agencies,
     and the 1,000 largest cities, counties, and towns.
     "Since the policy of single agency audit cognizance has
     already been established, we do not believe it is nec-
     essary to include the requirement in the uniform adminis-
     trative requirements. What is needed is the continuation
     of agency efforts to determine, in a practical way, the
     single agency that is best equipped to perform an audit
     in a given situation or in a given geographical area.
     Towards this objective we will continue to work with the
     agencies."
Reporting on cross-
service arrangements
     FMC 73-2 required each Federal agency to submit a report
by December 31, 1973, on the action taken to implement the
circular. The report was to include new cross-service ar-
rangements made. Additional reports were to be submitted at
6-month intervals until the circular was fully implemented.
We obtained the following information on HEW, EPA, Labor,
and CSA reporting.
     HEW
      HEW reported in January 1974 that no new cross-service
arrangements were made since FMC 73-2 was issued but that
HEW had agreements with the Defense Contract Audit Agency
(DCAA) for auditing HEW funds at not-for-profit organizations
and served as the cognizant audit agency for most of the in-
stitutions of higher education. The report also stated that
during fiscal year 1973, HEW performed work for 27 Federal
agencies, involving 81.5 staff-years of effort for which
it wan reimbursed $1.6 million. During this period four Fed-
eral agencies performed 29 staff-years of effort for HEW for
which it paid $589,504. HEW did not submit any additional
reports.


                             13
     EPA
     EPA has not submitted any reports on its implementation of
FMC 73-2; however, it did inform OMB in February 1972 of its im-
plementation of Circular A-73. The report stated that it has
established, on a reimbursable basis, a formal agreement with
DCAA for audit services in its areas of cognizance and a less
formal agreement with HEW and the Department of the Interior
for audit assistance.
     CSA
     OEO, the predecessor agency of CSA, reported in December
1973 that during the last 6-month period it had not entered
into any new cross-service arrangement; however, it did
renew interagency audit agreements with DCAA and HEW to
provide audit coverage of its contracts and grants to educa-
tional institutions and certain n#onprofit grantees on a reim-
bursable basis. Neither OEO nor CSA filed any other reports.
    DOL
     DOL reported in December 1973 that the Departments of
Defense, Agriculture, and the Interior provide support in
auditing Job Cor;s contractors and that negotiations were
proceeding with HEW to engage in a joint special audit of a
State automatic data processing installation that serviced
both DOL and HEW, as well as other Federal and State activi-
ties. Labor submitted progress reports in July 1974, January
1975, and July 1975.




                             14
                           CHAPTER 3
                  BARRIERS PREVENTING FURTHER
                    CROSS-SERVICE AUDITING
     There are several barriers which Federal agencies cite as
inhibiting them from entering into more cross-service auditing
arrangements. These barriers include (1) lack of Government-
wide information on grantees, (2) limited Federal audit staffs,
(3) lack of reimbursement procedures, (4) the large number of
Federal programs, and (5) the lack of a standard audit guide.
LACK OF GOVERNMENT-WIDE
FUNDINK INFORMATION BY GRANTEE
     Effective cross-service auditing requires advanced plan-
ning; however, meaningful advanced planning cannot be carried
out unless agency audit groups have the data with which to
identify opportunities for future cross-servicing. But neces-
sary data, such as identification of grantees that receive
funds from more than one Federal agency, grant amounts, grant
periods, and desired audit dates, is generally not available
either at the State or Federal level.
     Officials of the Office of Federal-State Resources in
Massachusetts told us that a list cI grantees receiving funds
from more than one Federal agency is not available. Although
State departments and agencies were required to file a fiscal
year 1975 'Federal Funds Report," many had not filed it or
the information was incomplete. The Office of Federal-State
Resources has been delegated the responsibility for developing
a system to report all Federal funds coming into Massachusetts.
     Audit officials from five of the six t deral agencies
contacted reported that they did not know whether their gran-
tees receive funds from any other Federal agency. Futhermore,
they do not have any method for obtaining this information
other than by contacting each grantee individually. At two
agencies, audit officials were unable to provide us with a
list of their grantees.
     In Texas we were unable to locate either at the State
level or at the regional offices of the Fede1al agencies
a list of grantees thet were funded by more than one Federal
agency.




                             15
LIMITED AUDIT STAFFS
     Audit officials of most of the Federal agencies contacted
reported that they do not have sufficient staff to Perform addi-
tional audit work for other Federal agencies. However, effec-
tive cross-service auditing should conserve audit manpower,
promote audit efficiency, and consequently reduce overall audit
requirements and costs.

LACK OF REIMBURSEMENT
PROCEDURES

     Several audit officials expressed a concern over how the
Federal agency which performed a single coordinated audit of a
grantee would be reimbursed by the other Federal agencies which
fund the grantee. Others expressed a concern over who would pay
for such audits if they are performed by non-Federal auditors,
such as State or local auditors or certified public accounting
firms.
     The problem of one Federal agency reimbursing another for
audit work performed by either Federal auditors or certified
public accounting firms seems easily surmountable. For example,
the Federal agencies could share the cost of the grantee audit
in proportion to the funds they provide the grantee or in some
other reasonable manner. The proble i of reimbursing State and
local auditors is more complex and is currently being considered
by the Joint Financial Management Improvement Program.

NUMBER OF PROGRAMS

     One Federal audit official expressed a concern about the
large number of Federal programs that auditors would have to
become familiar with if they performed a single coordinated
audit of all Federal grant funds provided to a grantee. This
may be a valid concern since the 1974 Catalog of Federal
Domestic Assistance lists 975 assistance programs, most of
w'ich are available to State and local governments. Most
grantees, however, receive funds under several Federal pro-
grars.  Thus, the auditor only has to learn about those pro-
grams which fund the grantee.

STANDARD AUDIT GUIDE

     Audit officials from two agencies felt that there is a
need for a standard audit guide which could be used for audit-
ing Federal grantees. This is a valid concern since presently
at least 48 audit guides exist which Federal agencies have
prepared for application to audits of federally assisted pro-
grams. We have, in cooperation with the intergovernmental

                             16
audit forum, developed and published in expob-ure draft form,
"Audit Guidelines for Audits of Financial Operations of Fed-
erally Aksisted Programs," to standardize procedures for
financial audits of State and local records for federally
assisted proirams.
     The consensus of agency audit officials is that the bar-
riers to more cross-service auditing are not insurmountable.
In fact, some barriers, such as reimbursement and audit guides,
appear to be easily surmountable. However, before any of the
barriers can be assessed, the universe of Federal grantees
which can be subjected to cross-service auditing arrangements
must be established.




                            17
                            CHAPTER 4
                  CONCLUSIONS AND RECONMMNDATIONS
CONCLUSIONS

     Federal agencies have worked out many crcss-service au-
diting arrangements over the last few yoars. In addition, the
Federal agencies, in cooperation with the intergovernmental
audit forums, are testing the single audit approach for gran-
tees receiving funds from several Federal agencies. However,
much work lies ahead to fully implement Circular 73-2 as it
relates to cross-servicing.
     There are several ongoing efforts aimed at overcoming the
barriers to further cross-service auditing. These efforts
include the Joint Financial Management Improvement Program
project which is directed toward studying the problem of reim-
bursing State and local auditors for auditing federally as-
sisted programs and developing a common financial audit guide
for federally assisted programs.
     OMB needs to work with the agencies to help identify and
overcome barriers to effective cross-servicing as contemplated
by Circular 73-2. Critical to effective implementation of the
circular is the establishment of a system for identifying
grantees which can be audited under cross-service agreements.
Such a system is needed to identify grantees which receive
funds from more than one Federal agency or under more than
one federally assisted program. To date, the Federal agen-
cies have not established such a system.
RECOMMENDATIONS
     We recommend that OMB assess the feasibility and practi-
cability of establishing a system to identify grantees which
receive funds from several Federal agencies or under several
federally assisted programs. Once these grantees are identi-
fied, OMB can work with the Federal grantor agencies to al-
leviate the other barriers to cross-service auditing.
     We also recommend, as we did in the case study, that OMB
revise its administrative requirements for Federal grants to
require that periodic audits encompass all Federal funding
and that copies of audit reports and related correspondence
be furnished by the audit organization to each funding source.




                             18
                           CHAPTER 5
                         AGENCY COMMENTS
     The Directors of Audits of HEW, DOL, EPA, and CSA and the
Inspector General of HUD generally agree with the findings,
conclusions, and recommendations of this report. All agree
that to achieve more effective cross-service auditing, the
universe of multifunded grantees where cross-servicing would
be feasible and advantageous should be identified, as well
as the sources and total amounts of such Federal funding.
     OMB replied that the report confirms the results of re-
cent discussions with the agencies dealing with the type of
cognizance system which might be applied to nonprofit grantees.
OMB also pointed out that the Audit Improvement Project of
the Joint Financial Management Tmprovement Program and our
reports dealing with audit will hopefully point the way toward
resolving the problems associated with auditing federally
assisted programs. Thus, OMB concluded that it hesitates to
make any extensive study of systems to identify grantees that
receive funds from several Federal agencies.
     We do not believe that the outcome of the Audit Improve-
ment Project or our reports will alter the need to identify
the universe of multifunded grantees where cross-servicing
would be feasible and advantageous. The establishment of such
a system is the first step to effective cross-service auditing.
     The need for such a system was reinforced by the Director
of Audits of one Federal agency who wrote in response to this
report:
    "Unless we are willing to reconcile ourselves to a case-
    by-case canvassing of grantees and contractors (and sub-
    grantees of various levels), and forced reliance on the
    data so obtained, we must aim for a centralized Federal
    system to provide this information. We feel that this
    conclusion is unavoidable, and that such an effort,
    despite the many difficulties involved, would be well
    worth its cost."




                             19
APPENDIX I                                                       APPENDIX I



            MASSACHUSETTS ORGANIZATIONS RECEIVING MORE

          THAN ONE FEDERAL AUDIT DURING FISCAL YEAR 1975

                                                Audit performed by
                                           certified public accounting
                                                      firm for
              Grantee                     'E   CSA   HEWCSA      LABOR   HUD

Springfield Action Commission, Inc.            X                  X
Community Teamwork, Inc., Lowell               X                  X
Montachusett Opportunity Council,
  Leominster                                               X       X
South Middlesex Opportunity Council,
  Framingham                                               X       X
Eastern Middlesex Opportunity Council,
  Somerville                                   X                  X
Action for Boston Community Develop-
  ment, Inc., Boston                           X                  X
Lynn Economic Opportunity, Inc.                            X      X
Cambridge Economic Opportunity
  Cummittee, Camoridge                         X                  X
Franklin Community Action Corp.,
  Greenfield                                   X                  X
Berkshire Community Action Council,
  Inc., Pittsfield                             X                  X
Hampshire Community Action Commission,
  Inc., Northampton                            X                   X
Greater Lawrence Community Action
  Council, Inc., Lawrence                      X                  X
On Board, Inc., New Bedford                                X      X
Community Action Programs Inter City,
  Inc., Chelsea                                X                  X
ABCD Delegate Aaencies, Boston                             X      X
Community and Regional Opportunity
  Program, Inc., Chicopee                                  X      X
Haverhill Community Action Commission,
  Inc., Haverhill                                          X       X
Worcester Community Action Council,
  Inc., Worcester                                          X       X
Technical Development Corporation,
  Concord                                                  X      X
Self-help, Inc., Brockton                      X                  X
Gilbert R. Green & Co., Inc., satick                 X            X
Contract Research Corp., Belmont                     X            X
Triumph, Inc., Taurton                               X            X
City of Fall River                                                X       X
City of Lowell                                                    X       X
City of Cambridge                                                 X       X
City of Boston                                                    X       X
City of Somerville                                                X       X
City Of Springfield                                               X       X
City of New Bedford                                               X       X


(91159)


                                   20