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
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)