oversight

Inspectors General: Enhancing Federal Accountability

Published by the Government Accountability Office on 2003-10-08.

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

                              United States General Accounting Office

GAO                           Testimony
                              Before the Subcommittee on Government Efficiency and
                              Financial Management, Committee on Government
                              Reform, House of Representatives


For Release on Delivery

Expected at 2:00 p.m. EDT
Wednesday, October 8, 2003

                              INSPECTORS GENERAL 

                              Enhancing Federal
                              Accountability
                              Statement of David M. Walker
                              Comptroller General of the United States




GAO-04-117T

                              a

                                              October 8, 2003


                                              INSPECTORS GENERAL
                                              Enhancing Federal Accountability
Highlights of GAO-04-117T, a testimony
before the Subcommittee on Government
Efficiency and Financial Management,
Committee on Government Reform,
House of Representatives




On the 25th anniversary of passage            The IGs have made a significant difference in federal performance and
of the Inspector General (IG) Act,            accountability during the past 25 years as indicated by their reports of
the Subcommittee sought GAO’s                 billions of dollars in savings to the public and numerous civil and
views on the role of the IGs in
providing independent oversight
                                              criminal referrals. They have earned a solid reputation for preventing and
within federal agencies and to                detecting fraud and abuse; promoting improvements in government
discuss the new and continuing                operations; and providing helpful analyses on a host of governmentwide
challenges faced by government                initiatives.
performance and accountability
professionals.                                Notwithstanding the accomplishments of the past, our nation now faces
                                              new challenges that demand even more from government performance
                                              and accountability professionals. For example, we are fighting
In order to enhance the                       international terrorism while facing a large and growing structural
effectiveness of federal                      deficit. In addition, recent corporate failures have shaken public
accountability professionals,                 confidence in financial reporting and accountability in the private sector.
Congress may wish to consider                 Federal auditors can learn important lessons from the accountability
establishing, through statute, a              breakdowns in the private sector and the resulting legislation passed by
small group of designated federal
accountability officials, such as             Congress.
representatives from GAO and IG
councils, to develop and implement            Closer strategic planning and ongoing coordination of audit efforts
a periodic strategic planning and             between GAO and the IGs would help to enhance the effectiveness and
ongoing coordination process for              impact of work performed by federal auditors. Working together and in
the manner in which GAO and IG                our respective areas of expertise in long-term challenges and agency-
work will be focused to provide               specific issues, GAO and the IGs can provide useful insights and
oversight to high-risk areas and
significant management challenges             constructive recommendations on a broad range of high-risk programs
across government, while                      and significant management challenges across government.
leveraging each other’s work and
minimizing duplication.                       A practical issue that has arisen is who pays the cost of agency financial
                                              statement audits. Many IGs have told us that the cost of agency financial
Congress may also want to                     audits has taken resources away from their traditional work. In the
consider enacting legislation                 private sector, the cost of financial audits is a routine business expense
making agencies responsible for
paying the cost of their financial
                                              borne by the entity being audited and represents a small percentage of
statement audits.                             total expenditures for the audited entity.

Congress may also wish to                     In a prior study, we considered the benefits of consolidating the smallest
consider restructuring the IGs,               IG offices with those of presidentially appointed IGs and converting
which would include elevating                 agency-appointed IGs to presidential appointment where their budgets
certain IGs to presidential                   were comparable. We believe that, if properly implemented, conversion
appointment and consolidating
                                              or consolidation of IG offices could increase the overall independence,
specific IG offices where benefits
can be shown.                                 economy, efficiency, and effectiveness of IGs.

www.gao.gov/cgi-bin/getrpt?GAO-04-117T.
To view the full product, click on the link
above. For more information, contact
Jeanette Franzel at (202) 512-9406 or
franzelj@gao.gov.
Mr. Chairman and Members of the Committee:

I appreciate the opportunity to share my thoughts with you on the
important role of the Inspectors General (IG), established in statute 25
years ago this month to provide independent oversight within federal
agencies. More significant for this discussion than the anniversary of
landmark legislation, however, are the new and continuing challenges we
face in assuring open, honest, effective, and accountable government and
the critical role of the IGs, in partnership with GAO and other performance
and accountability organizations, in addressing these challenges.

A quarter of a century ago, Congress established statutory IGs in response
to serious and widespread internal control breakdowns in major
government departments and agencies, questions about integrity and
accountability in government as a whole, and failures of oversight in the
federal government. The IGs established by the Inspector General Act of
1978 (IG Act) were charged with preventing and detecting fraud and abuse
in their agencies’ programs and operations; conducting audits and
investigations; and recommending policies to promote economy, efficiency,
and effectiveness. The IG Act fortified the position of IG with provisions
protecting independence, provided powers of investigation, and mandated
reporting not just to the agency head but to Congress as well. (See app. I
for a more detailed history of the IG Act.)

In the years since passage of the IG Act, Congress has also enacted a series
of laws to establish a foundation for efficient, effective, and accountable
government. This body of legislation has given IGs new responsibilities and
greater opportunities to play an increasing role in government oversight.
Clearly, the IGs have made a significant difference in federal performance
and accountability during the past 25 years as indicated by their reports of
billions of dollars in savings to the public and thousands of
recommendations and civil and criminal referrals. They have earned a solid
reputation for preventing and detecting fraud, waste, and abuse; promoting
improvements in government operations; and providing helpful analyses on
a host of governmentwide initiatives. It is safe to say that the federal
government is a lot better off today because of the IGs’ efforts.

Notwithstanding the accomplishments of the past, we now face continuing
challenges that demand even more from government performance and
accountability professionals. For example, our nation is fighting
international terrorism while much of the critical government
infrastructure that we are trying to protect dates back to the 1950s. At the



Page 1                                                           GAO-04-117T
same time, this nation is facing a large and growing structural deficit due
primarily to known demographic trends and rising health care costs.
Recent corporate failures have shaken public confidence in financial
reporting and accountability in the private sector. In response, Congress
passed the Sarbanes-Oxley Act of 2002, which has significant new
requirements for publicly traded companies and their auditors. Federal
auditors can learn important lessons from the accountability breakdowns
in the private sector and the resulting legislation passed by Congress.

We have achieved many important successes in working across
organizational lines with the IGs and state and local government auditors.
An important recent effort in building closer ties in the government
accountability community has been the domestic working group, which I
established in 2001 to bring together key staff from GAO, the IGs, and state
and local audit organizations to explore issues of mutual interest and
concern. The annual roundtable discussions and interim activities of the
domestic working group help to focus attention on key issues and shared
challenges facing the government audit community and allow participants
to compare notes on methods, tools, benchmarking results, and best
practices. In the early 1970s, GAO organized the intergovernmental audit
forums in cooperation with federal, state, and local audit organizations.
These forums provided the means through which new intergovernmental
audit relationships were developed and improved the usefulness of
auditing at each level of government. Some IGs have become active
participants with GAO at the forums to provide a means for exchanging
views, solving common problems, and promoting the acceptance and
implementation of government auditing standards. Other IGs, however,
have not been very involved in these forums and, in my view, this needs to
change.

In addition, we have had the active participation of many IGs and state and
local government auditors on the Comptroller General’s Advisory Council
on Government Auditing Standards. The Council provides advice and
guidance on revisions to the Comptroller General’s Government Auditing
Standards, commonly known as the “Yellow Book,” which is used by
government auditors at the federal, state, and local levels, as well as
contracted independent public accountants (IPA), in the audits of
government programs and activities. It is time, however, for IGs and other
members of the federal accountability community to build on past
successes by putting additional focus and efforts on reaching across
institutional lines and forming new alliances to address the complex
challenges facing our government and our nation.



Page 2                                                           GAO-04-117T
                      My statement today will focus on five main points:

                      •	 opportunities for increasing the effectiveness of the federal
                         performance and accountability community through an enhanced
                         strategic partnership between the IGs and GAO,

                      •	 coordination of the IG and GAO roles in agency financial statement
                         audits and the audit of the U.S. government’s consolidated financial
                         statements,

                      • the IG role in federal financial management advisory committees,

                      •	 structural streamlining within the IG community to increase resource
                         efficiencies, and

                      •	 matters for congressional consideration to enhance federal
                         performance and accountability.



The Need for an       One of the challenges facing the federal performance and accountability
                      community today is the need to meet increasing demands and challenges
Enhanced Strategic    with our current resources. Key to this challenge is determining how GAO
Partnership between   and the IGs can best complement each other and coordinate their efforts.
                      The IG Act requires that the IGs coordinate with GAO to avoid duplicating
the IGs and GAO       efforts. In practice, GAO has largely devoted its efforts to program
                      evaluations and policy analyses that look at programs and functions across
                      government, and with a longer-term perspective; at the same time, the IGs
                      have been on the front line of combating fraud, waste, and abuse within
                      each agency, and their work has generally concentrated on issues of
                      immediate concern with more of their resources going into uncovering
                      inappropriate activities and expenditures through an emphasis on
                      investigations. GAO and the IGs are, in many respects, natural partners. We
                      both report our findings, conclusions, and recommendations to Congress.
                      As I mentioned earlier, we share common professional audit standards
                      through the Yellow Book, and I am proud to say that several current IGs
                      and many of their staff are GAO alumni, including the Honorable Gaston
                      Gianni, the IG of the Federal Deposit Insurance Corporation and Vice-Chair
                      of the President’s Council on Integrity and Efficiency, and Barry Snyder, the
                      IG of the Federal Reserve Board and Vice-Chair of the Executive Council
                      on Integrity and Efficiency, who are on the panel following me today.




                      Page 3                                                            GAO-04-117T
                         While GAO and the IGs make up the federal performance and
                         accountability community, the division of responsibilities between them
                         has not generally included, nor does the IG Act include, strategic planning
                         and allocation of work across government programs based on risk and the
                         relative competitive advantages of each organization. Traditionally, GAO
                         and IG coordination has been applied on an ad-hoc, job-by-job or issue-by-
                         issue basis. We now have both the need and the opportunity to enhance the
                         effectiveness of federal oversight through more strategic and ongoing
                         coordination of efforts between GAO and the IGs in the following areas:

                         • addressing major management challenges and program risks,

                         •	 monitoring the top challenges the government faces, such as
                            implementation of the President’s Management Agenda, and

                         •	 conducting the audit of the government’s consolidated financial
                            statements.

                         Later in this testimony, I am suggesting that Congress consider
                         establishing, through statute, assignment of responsibility to a select group
                         of designated federal accountability and performance professionals to
                         engage in a formal, periodic strategic planning and ongoing engagement
                         coordination process to focus federal audit efforts across the federal
                         government. This process would be in addition to, and would not replace,
                         the current coordination of information sharing and technical cooperation
                         being implemented by the domestic working group, the audit forums, and
                         the President’s Council on Integrity and Efficiency (PCIE) and the
                         Executive Council on Integrity and Efficiency (ECIE).1



Major Management         GAO’s latest high-risk report,2 released in January 2003, highlights areas
Challenges and Program   across government that are at risk either due to their high vulnerability to
                         waste, fraud, abuse, and mismanagement, or as major challenges
Risks
                         associated with the economy, efficiency, and effectiveness of federal
                         programs, policies, processes, functions, or activities. Many of the high-risk


                         1
                          These councils were established by Executive Order and are described later in this
                         testimony.
                         2
                          U.S. General Accounting Office, High Risk Series: An Update, GAO-03-119 (Washington,
                         D.C.: January 2003).




                         Page 4                                                                        GAO-04-117T
                         areas we identified involve essential government services, such as
                         Medicare and mail delivery, that directly affect the well-being of the
                         American people. Although some agencies have made strong efforts to
                         address the deficiencies cited in the high-risk reports—and some of the
                         programs included on GAO’s initial high-risk list in 1990 have improved
                         enough to warrant removal—we continue to identify many other areas of
                         high risk. Greater strategic coordination between GAO and the IGs on a
                         plan for monitoring and evaluating high-risk issues and keeping the
                         pressure high to reduce the risk of these programs is not only desirable, it
                         is essential if we are to reduce the risk of key government programs.

                         At the request of Congress, the IGs annually report issues similar to those
                         in GAO’s high-risk report identifying the “Top Management Challenges”
                         facing their agencies. In fiscal year 2002, the IGs ranked information
                         technology, financial management, and human capital management among
                         the most important challenges confronting their agencies governmentwide;
                         other priorities included performance management, public health and
                         safety, and grants management. Each of these areas closely corresponds to
                         an area on GAO’s high-risk list.

                         Although both GAO and the IGs have efforts in place to identify major risks
                         and challenges within government, there is no mechanism in place to carry
                         out an integrated, strategic planning process as a means through which
                         these issues will be monitored and evaluated in the future through
                         combined and coordinated GAO and IG oversight.



President’s Management   The administration has signaled its commitment to government
Agenda                   transformation with the President’s Management Agenda (PMA), which
                         targets 14 of the most glaring problem areas in government for immediate
                         action. Five areas—strategic human capital, budget and performance
                         integration, improved financial performance, expanded electronic
                         government, and competitive sourcing—are governmentwide in scope,
                         while 9 are agency specific. Each area has the potential for dramatic
                         improvement and concrete results. The areas also reflect many of the
                         concerns raised by both GAO’s high-risk report and the IGs’ top
                         management challenge lists. So far, however, progress on PMA has been
                         uneven. To achieve consistent progress, sustained attention from Congress,
                         the administration, and the agencies is needed. I believe that GAO and the
                         IGs can make important contributions, using our combined experience, to
                         help monitor the implementation of this important initiative.




                         Page 5                                                            GAO-04-117T
                            Key policymakers increasingly need to think beyond quick fixes and
                            carefully consider what the proper role of the federal government should
                            be in the 21st century. Members of Congress and agency heads can start by
                            undertaking a top-to-bottom review of federal programs and policies to
                            determine which should remain priorities, which should be overhauled,
                            and which have outlived their usefulness or are just no longer affordable
                            given more pressing demands. Everything that forms the government’s
                            base must be on the table, including tax, spending, and regulatory policies.
                            Policymakers will need to distinguish “wants,” which are optional, from
                            “needs,” which can be urgent. They need to make hard choices that take
                            into account what the American people will support and what the federal
                            government can afford and sustain over time. To make informed decisions,
                            Congress and agency heads will require hard facts and professional
                            analyses that are objective, fact based, timely, accurate, nonpartisan, fair,
                            and balanced. GAO and the IGs are important sources of such objective
                            information and analyses.

                            With our respective areas of expertise in long-term challenges and agency-
                            specific issues, GAO and the IGs can provide useful insights and
                            constructive recommendations on programs that may warrant additional
                            resources, consolidation, revision, or even elimination. Closer periodic
                            strategic planning and ongoing engagement coordination between GAO
                            and the IGs would help to ensure continued effective oversight of these key
                            issues facing government.



Audit of the U.S.           GAO and the IGs are already partners in one of the most far-reaching
Government’s Consolidated   financial management initiatives in government—the yearly audits of the
                            federal government’s consolidated financial statements. Under the Chief
Financial Statements        Financial Officers (CFO) Act of 1990 as expanded by the Government
                            Management Reform Act of 1994, the IGs at the 24 agencies3 named in the
                            CFO Act are responsible for the audits of their agencies’ financial
                            statements. In meeting these responsibilities, most IGs have contracted
                            with IPAs to conduct the audits either entirely or in part. GAO is
                            responsible for the U.S. government’s consolidated financial statements


                            3
                             The Federal Emergency Management Agency (FEMA), one of 24 agencies named in the
                            CFO Act, was transferred to the new Department of Homeland Security (DHS), effective
                            March 1, 2003. With the transfer, FEMA will no longer be required to prepare audited stand-
                            alone financial statements under the CFO Act. Consideration is now being given to making
                            DHS a CFO Act agency, which would bring the number of CFO Act agencies back up to 24.




                            Page 6                                                                        GAO-04-117T
audit, which by necessity is based largely on the results of the IGs’ agency-
level audits.

Since 1997, GAO has been unable to give an opinion on the consolidated
financial statements, in large part because of continuing financial
management problems at several agencies that also have resulted in
disclaimers of opinion by some IGs on their agency financial statements—
most notably the Department of Defense (DOD). In recent years, we have
seen progress in the results of the audits of the CFO Act agency financial
statements with more and more IGs and their contracted IPAs moving from
issuing a disclaimer of opinion to issuing an unqualified (“clean”) opinion
on their respective agency financial statements. In fact, 21 of the 24 CFO
Act agencies received an unqualified opinion on their fiscal year 2002
financial statements, up from only 6 agencies for fiscal year 1996. We
anticipate that if sufficient progress continues to be made, there is a chance
that we may be able to render a qualified opinion on the consolidated
balance sheet in a few years as a first step toward rendering an opinion on
the full set of financial statements.

Our reviews of the work done by other IGs and IPAs on agency-level
financial statement audits during the last 2 years identified opportunities
for improvement in sampling, audit documentation, audit testing, analytical
procedures, and auditing liabilities. The varying quality of the audit work
has been of concern to us because of our need to use the work of the
agency auditors to support expressing an opinion on the U.S. government’s
consolidated financial statements—an opinion for which, in the final
analysis, GAO is solely responsible and accountable.

Earlier involvement and access by GAO in the agency-level financial
statement audits would help to strengthen the IG and IPA audit process and
bolster our ability to use their work in rendering an opinion. At a minimum,
GAO needs to (1) be involved up front in the planning phase of each
agency-level audit, (2) have unrestricted access to IG and IPA audit
documentation and personnel throughout the performance of the audit,
(3) receive assurances that each agency-level audit is planned, performed,
and reported in conformity with the Financial Audit Manual (FAM)
developed jointly and adopted by GAO and the PCIE, and (4) be notified in
advance of any planned deviation from the FAM’s requirements that could
affect GAO’s ability to use the agency auditors’ work.

At one agency (Department of Energy), for the selected areas we reviewed,
we found that the audit work was performed in conformity with the FAM



Page 7                                                             GAO-04-117T
and that we would have been able to use the work without having to
perform additional audit procedures. The IG has an oversight team
composed of senior-level staff who perform moderate-level quality control
reviews of the contracted IPA’s work throughout the audit process. The
oversight team evaluates its IPA in areas such as audit planning and
execution, audit documentation, and staff qualifications. These types of
practices could be shared and expanded upon across the IG community. As
an initial step to make the IG and IPA audit process stronger and enhance
GAO’s ability to use their work in rendering an opinion, we are considering
holding a forum with the IGs and the IPAs to share information—based on
GAO’s review of the IG and IPA work—regarding best practices and areas
to focus on that need additional audit work, and to establish a framework
for enhanced coordination of the financial statement audit work.

Changes to enhance the agency financial statement audit process are
especially important given the planned acceleration of reporting deadlines
for agency audits. Although some agencies accelerated their reports for
fiscal year 2002, starting with fiscal year 2004, the Office of Management
and Budget (OMB) has required that agencies issue their audited financial
statements no later than 45 days after the end of the fiscal year, with the
consolidated financial statements to be issued 30 days later. In past years,
when the reporting deadlines were 4 and 5 months after the end of the
fiscal year, agencies made extraordinary efforts in which they spent
considerable resources on extensive ad hoc procedures and made
adjustments of billions of dollars to produce financial statements months
after the fiscal year had ended. Given the accelerated reporting dates, such
extraordinary approaches will no longer be an option. Over the next few
years, as the government addresses the impediments to receiving an
opinion on its consolidated financial statements, and we move closer to
being able to render an opinion on the consolidated financial statements,
GAO will need to invest more resources in assuring that the work of the IGs
and IPAs on the agency-level financial statement audits can be used by
GAO to support the audit of the consolidated financial statements. This
resource investment is necessary if GAO is to be able to render an opinion
on the consolidated financial statements.

Another matter of concern regarding the audit of the U.S. government’s
consolidated financial statements involves the approaches used by the IGs
and IPAs for reporting on internal control at the agency level. Our position
is that an opinion on internal control is important in the government
environment and that the public should be able to expect audit assurance
on the adequacy of internal control over financial reporting. We believe that



Page 8                                                            GAO-04-117T
auditor opinions on internal control are a critical component of monitoring
the effectiveness of an entity’s risk management and accountability
systems. We also believe that auditor opinions on internal control are
appropriate and necessary for major public entities such as the CFO Act
agencies currently included in the U.S. government’s consolidated financial
statements.

As does GAO in connection with our own audits, several agency auditors
are voluntarily providing opinions on the agencies’ internal control; but
most do not. When an auditor renders an opinion on internal control, the
auditor is providing reasonable assurance that the entity has maintained
effective internal control over financial reporting (including safeguarding
of assets) and compliance such that material misstatements, losses, or
noncompliance that are material to the financial statements would be
detected in a timely fashion. For fiscal year 2002, however, only 3 of the 24
CFO Act agencies received opinions on internal control from their
auditors.4 The remaining 21 reported on internal control, but provided no
opinion on the effectiveness of the agency’s internal control. As we move
closer to being able to issue an opinion on the consolidated financial
statements, a disparity in reporting on internal control would hinder our
ability to provide an opinion on internal control for the consolidated audit.
Current agency-level reporting on internal control would fall short of what
the public should be able to expect from an audit and, moreover, what is
now legally required from the auditors of publicly traded companies.

Congress has prescribed auditor opinions on internal controls for publicly
traded corporations under the Sarbanes-Oxley Act of 2002.5 A final rule
issued by the Securities and Exchange Commission in June 2003 and
effective August 2003 provides guidance for implementation of section 404
of the act, which contains requirements for management and auditor
reporting on internal controls. The final rule requires companies to obtain a
report in which a registered public accounting firm expresses an opinion,
or states that an opinion cannot be expressed, concerning management’s
assessment of the effectiveness of internal controls over financial
reporting.



4
 The three agencies receiving opinions on internal control for fiscal year 2002 are the Social
Security Administration, General Services Administration, and Nuclear Regulatory
Commission.
5
Pub. L. No. 107-204, 116 Stat. 745 (2002).




Page 9                                                                          GAO-04-117T
As you know, Mr. Chairman, we provided testimony before this
Subcommittee several weeks ago on the challenges of establishing sound
financial management within DHS.6 In that testimony, we supported
provisions of H.R. 2886 that would require DHS to obtain an audit opinion
on its internal controls. During the testimony, we also supported provisions
of H.R. 2886 that would require the Chief Financial Officers Council and the
PCIE to jointly study the potential costs and benefits of requiring CFO Act
agencies to obtain audit opinions of their internal controls over financial
reporting. In addition, the current version of H.R. 2886 would require GAO
to perform an analysis of the information provided in the report and report
the findings to the House Committee on Government Reform and the
Senate Committee on Governmental Affairs. We believe that the study and
related analysis are important first steps in resolving the issues associated
with the current reporting on internal control.

Ultimately, we are hopeful that federal performance and accountability
professionals will not settle for anything less than opinion-level work on
internal control at the CFO Act agency level and on the governmentwide
audit. Increased planning and coordination will be needed among GAO,
IGs, and IPAs to determine the appropriate timing for requiring an opinion
on controls at the agency level. The specific timing will depend on the
current state of the agency’s control efforts so that an audit opinion on
internal control would add value and mitigate risk in a cost beneficial
manner.

A practical issue that should also be dealt with is the adequacy of resources
to provide for the agency financial statement audits. Over the years, a
number of IGs have told us that the cost of agency financial audits has
taken resources away from their traditional work. In the private sector, the
cost of an annual financial audit is a routine business expense borne by the
entity being audited, and the cost of the audit represents a very small
percentage of total expenditures for the audited entity. We support enacting
legislation that would make agencies responsible for paying the cost of
their financial statement audits. We also believe that an arrangement in
which the agencies pay for their own audits provides them with positive
incentives for taking actions—such as streamlining systems and cleaning
up their financial records prior to the audit—in order to reduce the costs of


6
 U.S. General Accounting Office, Department of Homeland Security: Challenges and Steps
in Establishing Sound Financial Management, GAO-03-1134T (Washington, D.C.: Sept. 10,
2003).




Page 10                                                                  GAO-04-117T
                         the audit and avoid the “heroic” audit efforts that we have seen in the past
                         at some agencies.

                         Under the arrangement in which agencies pay the cost of their own audits,
                         we believe the IG should continue in the current role of selecting and
                         overseeing audits in those cases in which the IG does not perform the audit
                         but hires an IPA to conduct the audit. This would leverage the IGs’
                         expertise to help assure the quality of the audits. We also advocate an
                         approach whereby the IGs would be required to consult with the
                         Comptroller General during the IPA selection process to obtain input from
                         the results of GAO’s reviews of the IPAs’ previous work and the potential
                         impact on the consolidated audit.



The IG Role in Federal   We envision an important role for the IGs in audit or financial management
                         advisory committees established at the federal agency level for the purpose
Financial Management     of overseeing an agency’s financial management, audits, and performance.
Advisory Committees
                         In the government arena, some state and local governments and federal
                         government corporations, as well as several federal agencies, have adopted
                         an audit committee, or “financial management advisory committee,”
                         approach to governance. In the federal government, such audit committees
                         or advisory committees are intended to protect the public interest by
                         promoting and facilitating effective accountability and financial
                         management by providing independent, objective, and experienced advice
                         and counsel, including oversight of audit and internal control issues.
                         Responsibilities of the committees would likely include communicating
                         with the auditors about the audit and any related issues. The work of the
                         IGs logically provides much of the basis for financial management advisory
                         committees in overseeing agencies’ financial management, audits, and
                         internal control. The work of the IGs would also be critical for the financial
                         management advisory committees in their general governance roles.
                         Specific roles and responsibilities of the committees will most likely vary
                         by agency. A recently published guide, Financial Management Advisory
                         Committees for Federal Agencies,7 provides a helpful road map of
                         suggested practices for federal agency financial management advisory
                         committees.


                         7
                         Financial Management Advisory Committees for Federal Agencies: Suggested Practices,
                         March 2003, prepared by KPMG, LLP.




                         Page 11                                                                GAO-04-117T
                          The concept of financial management advisory committees is very similar
                          to the audit committee structure being used in the private sector. To help
                          facilitate the audit process and promote disclosure and transparency, the
                          governing boards of publicly traded companies use audit committees.
                          Audit committees generally oversee the independent audit of the
                          organization’s financial statements and address financial management,
                          reporting, and internal control issues. The Sarbanes-Oxley Act has
                          requirements for the audit committees of publicly traded companies and
                          their auditors regarding communications and resolution of significant audit
                          matters.

                          We strongly support the implementation of financial management advisory
                          committees for selected federal agencies, based on risk and value added.
                          Some agencies,8 including GAO, which has had such a committee in place
                          since 1995, have already implemented such an approach, even though the
                          committees have not been mandated or established by statute. As these
                          committees are implemented or required in government, we would
                          advocate amending the IG Act to emphasize the IGs’ unique role in
                          reporting the results of their work to the advisory committees while
                          maintaining their independence and dual reporting authority to Congress.



Structural Streamlining   One of the issues facing the IG community as well as others in the
                          performance and accountability community is how to use limited resources
to Increase Resource      to the best effect. In fiscal year 2002, the 57 IG offices operated with total
Efficiencies              fiscal year budgets of about $1.6 billion and about 11,000 staff. (See app. II
                          for more detail on IG budgets and staffs.) Most IGs for cabinet departments
                          and major agencies are appointed by the President and confirmed by the
                          Senate; however, IGs for some agencies are appointed by the agency head,
                          and these IGs generally have smaller budgets and fewer staff than IGs
                          appointed by the President. While agency-appointed IGs make up about
                          half of all IG offices, the total of their fiscal year 2002 budgets was $162.2
                          million, a little more than 10 percent of all IG budgets. Of these IGs, the
                          offices at the U.S. Postal Service (USPS), Amtrak, National Science
                          Foundation (NSF), and Federal Reserve Board (FRB) are exceptions and
                          have budgets that are comparable in size to those of presidentially
                          appointed IGs. The remaining 24 agency-appointed IGs have a total of 191


                          8
                           Agencies that currently have audit committees or financial management advisory
                          committees include the National Science Foundation, Federal Deposit Insurance
                          Corporation, and the Architect of the Capitol.




                          Page 12                                                                    GAO-04-117T
                      staff and have budgets that make up about 2 percent of all IG budgets.
                      Importantly, 16 of the 28 agency-appointed IGs have fewer than 10 staff.



Potential IG Office   Last year we reported the views of the IGs, as well as our own, on the
Consolidations        possible benefits of consolidating the smallest IG offices with the offices of
                      IGs appointed by the President.9 We also considered the conversion of
                      agency-appointed IGs to presidential appointment where their budgets
                      were comparable to the presidentially appointed IG offices. The August
                      2002 report contains several matters for congressional consideration to
                      address issues of IG conversion and consolidation. We are reaffirming
                      these views, which are included at the end of my statement.

                      We believe that if properly structured and implemented, the conversion or
                      consolidation of IG offices could increase the overall independence,
                      efficiency, and effectiveness of the IG community. Consolidation could
                      provide for a more effective and efficient allocation of IG resources across
                      government to address high-risk and priority areas. It would not only
                      achieve potential economies of scale but also provide a critical mass of
                      skills, particularly given advancing technology and the ever-increasing need
                      for technical staff with specialized skills. This point is especially
                      appropriate to the 12 IG offices with five or fewer staff. IG staff now in
                      smaller offices would, in a large, consolidated IG office, have immediate
                      access to a broader range of resources to use in dealing with issues
                      requiring technical expertise or areas of critical need.

                      Consolidation would also strengthen the ability of IGs to improve the
                      allocation of human capital and scarce financial resources within their
                      offices and to attract and retain a workforce with talents, multidisciplinary
                      knowledge, and up-to-date skills to ensure that each IG office is equipped
                      to achieve its mission. Consolidation would also increase the ability of
                      larger IG offices to provide methods and systems of quality control in the
                      smaller agencies.

                      We also recognize that there are potential risks resulting from
                      consolidation that would have to be mitigated through proactive and
                      targeted actions in order for the benefits of consolidation to be realized
                      without adversely affecting the audit coverage of small agencies. For

                      9
                       U.S. General Accounting Office, Inspectors General: Office Consolidation and Related
                      Issues, GAO-02-575 (Washington, D.C.: August 2002).




                      Page 13                                                                     GAO-04-117T
example, the potential lack of day-to-day contact between the IG and
officials at smaller agencies as a result of consolidation could be mitigated
by posting IG staff at the agency to keep both the IG and the agency head
informed and to coordinate necessary meetings. In preparation for
consolidation, staff in the smaller IG offices could be consulted in planning
oversight procedures and audit coverage for their agencies. There may be
fewer audits or even less coverage of those issues currently audited by the
IGs at smaller agencies, but coverage by a consolidated IG could address
areas of higher risk, value, and priority, resulting in potentially more
efficient and effective use of IG resources across the government.

Results of the survey conducted for our August 2002 report indicate a clear
delineation between the responses of the presidentially appointed IGs and
the responses of the agency-appointed IGs. The presidentially appointed
IGs generally indicated that agency-appointed IG independence, quality,
and use of resources could be strengthened by conversion and
consolidation. The agency-appointed IGs indicated that there would either
be no impact or that these elements could be weakened. The difference in
views is not surprising given the difference in the potential impact of
consolidation on the interests of the two groups of IGs. We believe that this
difference in perspective, more than any other factor, helps to explain the
significant divergence in the responses to the survey.

There are already some examples where consolidation of IG offices and
oversight is working. The Department of State IG provides, through statute,
oversight of the Broadcasting Board of Governors and the International
Broadcasting Bureau. The IG at the Agency for International Development
is authorized by specific statutes to provide oversight of the Overseas
Private Investment Corporation, the Inter-American Foundation, and the
African Development Foundation.

In terms of budget size, the agency-appointed IGs at USPS, Amtrak, NSF,
and FRB are comparable to the offices of IGs appointed by the President.
Moreover, in the case of the Postal IG, the office is the fourth largest of all
the IGs. (See app. II.) On that basis, these IGs could be considered for
conversion to appointment by the President with Senate confirmation.
While the Amtrak IG could be converted because of comparable budget
size, oversight of Amtrak is closely related to the work of the Department
of Transportation IG. Moreover, the Transportation IG currently provides
some oversight of Amtrak programs. Therefore, the consolidation of the
Amtrak IG with the Transportation IG could be considered, rather than
conversion.



Page 14                                                             GAO-04-117T
               Consideration has been given in the Fiscal Year 2004 Budget of the U.S.
               Government to the consolidation of the two IG offices at the Department of
               the Treasury, unique in the federal government. The original statutory IG
               for the Department of the Treasury was established by the IG Act
               amendments of 1988. The Treasury IG for Tax Administration was
               established in 1998 as part of an Internal Revenue Service (IRS)
               reorganization because the former IRS Inspection Service was not
               perceived as being sufficiently independent from management.
               Consequently, the IRS Office of the Chief Inspector, along with most of the
               Inspection Service staff, was transferred to the new IG office to ensure
               independent reviews.

               The separate office of Treasury IG for Tax Administration was created
               because IRS officials were concerned that if the resources of the IRS
               Inspection Service were transferred to the original Treasury IG office, they
               would be used to investigate or audit other Treasury bureaus to the
               detriment of critical IRS oversight. With the passage of the Homeland
               Security Act of 2002, and the transfer of Treasury’s United States Customs
               Service and United States Secret Service to the new Department of
               Homeland Security, the original concerns about competition for resources
               within the department should no longer be as compelling.



IG Councils	   The PCIE is an interagency council comprising principally the
               presidentially appointed and Senate-confirmed IGs. It was established by
               Executive Order No.12301 in 1981 to coordinate and enhance the work of
               the IGs. In 1992, Executive Order No.12805 created the ECIE, which
               comprises primarily statutory IGs appointed by the heads of designated
               federal entities as defined in the IG Act. The Deputy Director for
               Management in OMB serves as the chair of both organizations. These IG
               councils have been effective in coordinating the activities of the IGs in their
               efforts to prevent and detect fraud, waste, and abuse throughout the
               federal government and in reporting these results to both the President and
               Congress.

               The IG councils have provided a valuable forum for auditor coordination.
               However, we believe that the current environment demands a more formal,
               action-oriented, and strategic approach for coordination among federal
               audit organizations and that the IG councils could be strengthened in a
               number of ways. First, by providing a statutory basis for their roles and
               responsibilities, the permanence of the councils could be established and
               their ability to take on more sensitive issues strengthened. In addition, the



               Page 15                                                             GAO-04-117T
                strategic focus of the councils could be clearly established. As such, the
                councils would also be key in the overall strategic planning process for
                federal audit oversight that I described earlier in this statement.



Matters for     As I stated at the beginning of my testimony, IGs have made a significant
                difference in federal performance and accountability during the last quarter
Congressional   century. The 25th anniversary of the landmark legislation establishing the
Consideration   IGs is an opportune time to reflect on the IGs’ success while also
                considering ways to enhance coordination and utilization of resources
                across the federal performance and accountability community.

                In order to enhance the effectiveness and impact of the federal
                accountability community, Congress may want to consider establishing,
                through statute, assignment of responsibility to a selected group of
                designated federal accountability officials, such as representatives from
                GAO, the PCIE, and the ECIE, to develop and implement a periodic, formal
                strategic planning and ongoing engagement coordination process for
                focusing GAO and IG work to provide oversight to high-risk areas and
                significant management challenges across government, while leveraging
                each other’s work and minimizing duplication.

                In order to resolve resource issues and provide positive incentives to
                agencies to take prudent actions to reduce overall audit costs, Congress
                may want to consider enacting legislation that makes agencies responsible
                for paying the cost of their financial statement audits.

                In order to achieve potential efficiencies and increased effectiveness
                across the federal IG community, Congress may also want to consider
                whether to proceed with a restructuring of the IG community, which could
                include the following:

                •	 amending the IG Act to elevate the IGs at USPS, NSF, and FRB to
                   presidential status,

                •	 amending the IG Act to consolidate agency-appointed IGs with
                   presidentially appointed IGs based on related agency missions or where
                   potential benefits to IG effectiveness can be shown, and

                •	 establishing an IG council by statute that includes stated roles and
                   responsibilities and designated funding sources.




                Page 16                                                           GAO-04-117T
Mr. Chairman, that concludes my prepared statement. I would be happy to
respond to any questions you or Members of the Subcommittee might have.




Page 17                                                     GAO-04-117T
Appendix I

The Inspector General Act



               The Inspector General Act of 1978 was enacted following a series of events
               that emphasized the need for more-independent and coordinated audits
               and investigations in federal departments and agencies. First, in 1974, the
               Secretary of Agriculture abolished the department’s administratively
               established IG office, demonstrating the impermanent nature of a
               nonstatutory IG. Later, in 1974 and 1975, a study by the Intergovernmental
               Relations and Human Resources Subcommittee of the House Government
               Operations Committee disclosed inadequacies in the internal audit and
               investigative procedures in the Department of Health, Education, and
               Welfare, now the Department of Health and Human Services. The need to
               deal more effectively with the danger of loss from fraud and abuse in the
               department’s programs led to the establishment of the first statutory IG in
               1976. The Congress also established an IG in the Department of Energy
               when that department was created in 1977.

               In 1977, the House Intergovernmental Relations and Human Resources
               Subcommittee began a comprehensive inquiry to determine whether other
               federal departments and agencies had a similar need for statutory IGs. The
               Subcommittee’s study revealed serious deficiencies in a number of
               department and agency audit and investigative efforts, including the
               following:

               • No central leadership of auditors and investigators existed.

               •	 Auditors and investigators exhibited a lack of independence by
                  reporting to officials who had responsibility for programs that were
                  being audited.

               •	 No procedures had been established to ensure that the Congress was
                  informed of serious problems.

               • No program existed to look for possible fraud or abuse.

               As an initial effort to correct these deficiencies, the IG Act of 1978
               established 12 additional statutory OIGs to be patterned after the one at the
               Department of Health, Education, and Welfare. The act consolidated the
               audit and investigative responsibilities of each department and agency
               under the direction of one senior official—the Inspector General—who
               reports to the head of the agency or, if delegated, the official next in rank
               below the agency head. The President appoints the IGs, by and with the
               consent of the Senate, without regard to political affiliation and solely on
               the basis of integrity and demonstrated ability in accounting, financial



               Page 18                                                           GAO-04-117T
Appendix I

The Inspector General Act





analysis, law, management analysis, public administration, or
investigations.

The IGs are responsible for (1) conducting and supervising audits and
investigations, (2) providing leadership and coordination and
recommending policies to promote economy, efficiency, and effectiveness,
and (3) detecting fraud and abuse in their agencies’ programs and
operations. In addition, the IG Act requires IGs to prepare semiannual
reports which summarize the activities of the IG during the preceding 6-
month period. The reports are forwarded to the department or agency
head, who is responsible for transmitting them to the appropriate
congressional committees.

The act states that neither the agency head nor the official next in rank
shall prevent or prohibit the IG from initiating, carrying out, or completing
any audit or investigation, or from issuing any subpoena during the course
of any audit or investigation. This enhances the independence of auditors
and investigators by ensuring that they are free to carry out their work
unobstructed by agency officials. The act further enhances independence
by requiring IGs to comply with the Comptroller General’s Government
Auditing Standards. One of these standards requires auditors and audit
organizations to be personally and organizationally independent and to
maintain the appearance of independence so that opinions, conclusions,
judgments, and recommendations will be impartial and will be viewed as
such by knowledgeable third parties.

Between the enactment of the IG Act in 1978 and 1988, the Congress passed
legislation to establish statutory IGs, who are appointed by the President
with Senate confirmation, in 8 additional departments and agencies. In
1988, the Congress enacted the Inspector General Act Amendments of 1988
and the Government Printing Office (GPO) Inspector General Act of 1988
(Titles I and II, Public Law 100-504) to establish additional presidentially
appointed IGs in 5 departments and agencies and 34 IGs appointed by their
agency heads (33 in designated federal entities and 1 in GPO) in order to
strengthen the capability of the existing internal audit offices and improve
audit oversight. Both GAO and the President’s Council on Integrity and
Efficiency (PCIE) had previously reported that the existing internal audit
offices lacked independence, adequate coverage of important programs,
and permanent investigative staff.




Page 19                                                           GAO-04-117T
Appendix II

Inspector General Budgets and Staffing




               Table 1: Inspectors General Appointed by the President, Fiscal Year 2002 Budgets
               and Full-Time Equivalents (FTEs)

               Federal departments/agencies                                                                   Budgets       FTEs
               1       Department of Health and Human Servicesa                                           $227,000,000      1,569
               2       Department of Defense                                                               151,000,000      1,215
               3       Treasury IG for Tax Administration                                                  130,000,000       943
               4       Department of Housing and Urban Development                                          95,000,000       648
               5       Social Security Administration                                                       75,000,000       564
               6       Department of Agriculture                                                            75,000,000       642
               7       Department of Labor                                                                  67,000,000       426
               8       Department of Justice                                                                65,000,000       329
               9       Department of Veterans Affairs                                                       57,000,000       393
               10      Department of Transportation                                                         50,000,000       454
               11      Department of Homeland Security                                                      47,000,000       336
               12      Environmental Protection Agency                                                      46,000,000       444
               13      Department of Education                                                              39,000,000       276
               14      Department of the Interior                                                           37,000,000       251
               15      General Services Administration                                                      36,000,000       273
               16      Department of Energy                                                                 32,000,000       250

               17      Agency for International Development                                                 32,000,000       166

               18      Federal Deposit Insurance Corporation                                                32,000,000       201

               19      Department of State                                                                  29,000,000       234

               20      National Aeronautics and Space Administration                                        24,000,000       200

               21      Department of Commerce                                                               21,000,000       136

               22      Small Business Administration                                                        12,000,000       108

               23      Department of the Treasury                                                           12,000,000         87

               24      Office of Personnel Management                                                       11,000,000         89

               25      Tennessee Valley Authority                                                             7,000,000        87

               26      Nuclear Regulatory Commission                                                          6,000,000        41

               27      Railroad Retirement Board                                                              6,000,000        51

               28      Corporation for National and Community Service                                         5,000,000        16

               29      Central Intelligence Agencyb                                                                 na         na

               Total                                                                                     $1,426,000,000    10,429

               Source: Budget authority and FTEs from Fiscal Year 2004 Budget of the U.S. Government.

               a
               Includes budget authority to combat health care fraud.

               b
               Budget and FTE information not available.





               Page 20                                                                                                GAO-04-117T
Appendix II

Inspector General Budgets and Staffing





Table 2: Inspectors General Appointed by Agency Heads, Fiscal Year 2002 Budgets
and Full-Time Equivalents (FTEs)

Federal agencies                                             Budgets      FTEs
1      U.S. Postal Service                              $117,324,000        713
2      Amtrak                                               8,706,539        64
3      National Science Foundation                          6,760,000        50
4      Federal Reserve Board                                3,878,000        29
5      Government Printing Office                           3,400,000        24
6      Legal Services Corporation                           2,500,000        15
7      Peace Corps                                          2,006,000        16
8      Smithsonian Institution                              1,800,000        17
9      Federal Communications Commission                    1,569,000        10
10     National Archives and Records Administration         1,375,000        13
11     Securities and Exchange Commission                   1,372,559         8
12     National Credit Union Administration                 1,338,135         7
13     Pension Benefit Guaranty Corporation                 1,300,000        11
14     Equal Employment Opportunity Commission              1,106,119        10
15     Federal Housing Finance Board                         858,237          3
16     Farm Credit Administration                            829,621          5
17     Commodity Futures Trading Commission                  735,800          4
18     Corporation for Public Broadcasting                   735,000          9
19     National Labor Relations Board                        711,900          6
20     Federal Trade Commission                              710,000          5
21     National Endowment for the Humanities                 497,000          5
22     Appalachian Regional Commission                       466,000          3
23     Federal Maritime Commission                           441,034          3
24     Consumer Product Safety Commission                    407,000          3
25     Federal Election Commission                           392,600          4
26     National Endowment for the Arts                       392,577          4
27     International Trade Commission                        389,500          4
28     Federal Labor Relations Authority                     222,500          2
Total                                                   $162,224,121      1,047
Source: As reported by the ECIE.




Page 21                                                             GAO-04-117T
Appendix II

Inspector General Budgets and Staffing





Table 3: Inspectors General Appointed by the President with Four Comparable
Agency-Appointed IGs Fiscal Year 2002 Budgets

                                                                                   Fiscal year
Department/agency IG                                                             2002 budgets
1     Department of Health and Human Servicesa                                   $227,000,000
2     Department of Defense                                                       151,000,000
3     Treasury's IG for Tax Administration                                        130,000,000
4     U.S. Postal Serviceb                                                        117,324,000
5     Department of Housing and Urban Development                                  95,000,000
6     Department of Agriculture                                                    75,000,000
7     Social Security Administration                                               75,000,000
8     Department of Labor                                                          67,000,000
9     Department of Justice                                                        65,000,000
10 Department of Veterans Affairs                                                  57,000,000
11 Department of Transportation                                                    50,000,000
12 Department of Homeland Security                                                 47,000,000
13 Environmental Protection Agency                                                 46,000,000
14 Department of Education                                                         39,000,000
15 Department of the Interior                                                      37,000,000
16 General Services Administration                                                 36,000,000
17 Department of Energy                                                            32,000,000
18 Agency for International Development                                            32,000,000
19 Federal Deposit Insurance Corporation                                           32,000,000
20 Department of State                                                             29,000,000
21 National Aeronautics and Space Administration                                   24,000,000
22 Department of Commerce                                                          21,000,000
23 Department of the Treasury                                                      12,000,000
24 Small Business Administration                                                   12,000,000
25 Office of Personnel Management                                                  11,000,000
26 Amtrakb                                                                           8,706,539
27 Tennessee Valley Authority                                                        7,000,000
28 National Science Foundationb                                                      6,760,000
29 Nuclear Regulatory Commission                                                     6,000,000
30 Railroad Retirement Board                                                         6,000,000
31 Corporation for National and Community Service                                    5,000,000
32 Federal Reserve Board b                                                           3,878,000
                                               c
33 Central Intelligence Agency                                                             na
Total                                                                           $1,562,668,539
Source: Budget authority from Fiscal Year 2004 Budget of the U.S. Government.




Page 22                                                                           GAO-04-117T
           Appendix II

           Inspector General Budgets and Staffing





           Note: The four comparable agency appointed IGs are in bold.

           a
               Includes budget authority to combat health care fraud. 

           b
               Information supplied by the ECIE.

           c
            Budget information not available.





(194355)   Page 23                                                        GAO-04-117T
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