oversight

Single Audit: Efforts Underway To Implement 1996 Refinements

Published by the Government Accountability Office on 1999-05-13.

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 Management,
                          Information and Technology, Committee on Government
                          Reform, House of Representatives


For Release on Delivery
Expected at
10 a.m.
                          SINGLE AUDIT
Thursday,
May 13, 1999

                          Efforts Underway To
                          Implement 1996
                          Refinements
                          Statement of David L. Clark, Jr.
                          Director, Audit Oversight and Liaison
                          Accounting and Information Management Division




GAO/T-AIMD-99-177
                        Mr. Chairman and Members of the Subcommittee:

                        I am pleased to be here today to discuss the status of efforts to implement
                        the Single Audit Act Amendments of 1996. These amendments refined the
                        single audit requirements enacted 12 years earlier, in 1984. The 1996
                        refinements and the Office of Management and Budget’s (OMB)
                        implementing guidance provide the underpinnings to improve the auditing
                        for the more than $300 billion annually of federal assistance provided to
                        nonfederal entities.

                        As a result of the 1996 amendments, uniform requirements are now in place
                        for all federal grant recipients--state and local governments, colleges and
                        universities, hospitals, and nonprofit entities. Many of the audit burdens
                        previously facing these governments and nonprofit organizations have
                        been reduced and the audits will be more effective because they will focus
                        on the programs that present the greatest financial risk to the federal
                        government.

                        The changes embodied in the 1996 refinements were developed through the
                        collaborative efforts of the many stakeholders in the single audit process,
                        including OMB, the federal inspectors general, federal and state program
                        managers, the state auditors, the public accounting profession, and us.
                        This Subcommittee played an important role by supporting the legislation
                        needed to enact those changes.

                        Today, I would like to provide a perspective on the importance of the 1996
                        amendments, describe some of the actions taken to implement them, and
                        discuss ways in which the refinements will continue to evolve and benefit
                        future single audit efforts. Because of phased-in effective dates in the law
                        and in the OMB implementing guidance, it is too early to fully assess the
                        effectiveness of refinements. However, this hearing should help to keep
                        attention on the refinements and ensure that the momentum achieved thus
                        far in implementing the 1996 amendments continues.



Evolution of the 1996   The concept of the single audit was created to replace multiple grant audits
                        with one audit of an entity as a whole. The single audit is an
Refinements             organizationwide audit that focuses on internal control and the recipient’s
                        compliance with laws and regulations governing the federal financial
                        assistance received. The objectives of the Single Audit Act, as amended,
                        are to




                        Page 1                                                     GAO/T-AIMD-99-177
• promote sound financial management, including effective internal
  controls, with respect to federal awards administered by nonfederal
  entities;
• establish uniform requirements for audits of federal awards
  administered by nonfederal entities;
• promote the efficient and effective use of audit resources;
• reduce burdens on state and local governments, Indian tribes, and
  nonprofit organizations; and
• ensure that federal departments and agencies, to the maximum extent
  practicable, rely upon and use audit work done pursuant to the act.

We studied the single audit process, and in June 1994, we reported1 on
financial management improvements resulting from single audits, areas in
which the single audit process could be improved, and ways to maximize
the usefulness of single audit reports. We recommended refinements to
improve the usefulness of single audits through more effective use of single
audit resources and enhanced single audit reporting, and in March 1996, we
testified2 before this Subcommittee on the proposed refinements.

Subsequently, in July 1996, the refinements to the 1984 act were enacted.
The 1996 amendments were effective for audits of recipients for fiscal
years ending June 30, 1997, and after. The refinements cover a range of
fundamental areas affecting the single audit process and single audit
reporting, including provisions to

• extend the law to cover all recipients of federal financial assistance,
• ensure a more cost-beneficial threshold for requiring single audits,
• more broadly focus audit work on the programs that present the
  greatest financial risk to the federal government,
• provide for timely reporting of audit results,
• provide for summary reporting of audit results,
• promote better analyses of audit results through establishment of a
  federal clearinghouse and an automated database, and
• authorize pilot projects to further streamline the audit process and
  make it more useful.




1
    Single Audit: Refinements Can Improve Usefulness (GAO/AIMD-94-133, June 21, 1994).

2 Single   Audit: Refinements Can Improve Usefulness (GAO/T-AIMD-96-77, March 29, 1996).




Page 2                                                                        GAO/T-AIMD-99-177
OMB’s Role             In June 1997, OMB issued Circular A-133, Audits of States, Local
                       Governments, and Non-Profit Organizations. The Circular establishes
                       policies to guide implementation of the Single Audit Act 1996 amendments
                       and provides an administrative foundation for uniform audit requirements
                       for nonfederal entities that administer federal awards. OMB also issued a
                       revised OMB Circular A-133 Compliance Supplement.

                       The Compliance Supplement identifies for single auditors the key program
                       requirements that federal agencies believe should be tested in a single audit
                       and provides the audit objective and suggested audit procedures for testing
                       those requirements. We reported in our 1994 report that the Compliance
                       Supplement had not kept pace with changes to program requirements, and
                       had only been updated once since it was issued in 1985. We recommended
                       that the Compliance Supplement be updated at least every 2 years. OMB is
                       now updating this supplement on a more regular basis. The initial
                       Compliance Supplement for audits under the 1996 amendments was issued
                       in June 1997. A revision was issued for June 1998 audits in May 1998, and a
                       revision for June 1999 audits was just recently finalized.

                       We commend OMB for its leadership in developing and issuing the
                       guidance and the collaborative efforts of the federal inspectors general,
                       federal and state program managers, the state auditors, and the public
                       accounting profession in working with OMB proactively to ensure that the
                       guidance effectively implements the 1996 refinements.



Key Refinements and    Highlighted below are several of the key refinements and some of the
                       actions taken to implement them.
Actions to Implement
Them

Law Extended to All    The 1984 act did not cover colleges, universities, hospitals, or other
Recipients             nonprofit recipients of federal assistance. Instead, audit requirements for
                       these entities were established administratively in a separate OMB audit
                       circular, which in some ways was inconsistent with the audit circular that
                       covered state and local governments. For example, the criteria for
                       determining which programs received detailed audit coverage were
                       different between the circulars.




                       Page 3                                                      GAO/T-AIMD-99-177
                       The 1996 amendments expanded the scope of the act to include nonprofit
                       organizations. To implement the 1996 amendments, OMB combined the
                       two audit circulars into one that provided consistent audit requirements for
                       all recipients.


More Cost-Beneficial   The 1996 refinements and OMB Circular A-133 require a single audit for
Thresholds             entities that spend $300,000 or more in federal awards, and exempt any
                       entity that spends less than that amount in federal awards.3 Also, the
                       threshold is based on expenditures rather than receipts.

                       The Congress intended for the entities receiving the greatest amount of
                       federal financial assistance disbursed each year to be audited while
                       exempting entities receiving comparatively small amounts of federal
                       assistance. To achieve this, a $100,000 single audit threshold was included
                       in the 1984 act.4 The fixed threshold, however, did not take into account
                       future increases in amounts of federal financial assistance. As a result,
                       over time, audit resources were being expended on entities receiving
                       comparatively small amounts of federal financial assistance.

                       In 1984, we reported that setting the threshold for requiring single audits at
                       $100,000 would result in 95 percent of all direct federal financial assistance
                       being covered by single audits. In 1994, we reported that coverage at the
                       same 95 percent level could be achieved with a $300,000 threshold.

                       Also, the refinements require the Director of OMB to biennially review the
                       threshold dollar amount for requiring single audits. The Director may
                       adjust upward the dollar limitation consistent with the Single Audit Act’s
                       purpose. We supported such a provision when the amendments were being
                       considered by the Congress. Exercising this authority in the future will
                       allow the flexibility for the OMB Director to administratively maintain the
                       single audit threshold at a reasonable level without the need for further
                       periodic congressional intervention.




                       3 If
                          a recipient receives funds under only one program, the Single Audit Act amendments allows the
                       option of a program-specific audit instead of a single audit.

                       4 The1984 act included a $25,000 threshold but gave each entity that received between $25,000 and
                       $100,000 in federal assistance an option to have separate audits of each of its federal assistance
                       programs or a single audit. The 1996 amendments eliminated the dual thresholds.




                       Page 4                                                                          GAO/T-AIMD-99-177
                           As a result of these changes, audit attention is focussed more on entities
                           receiving the largest amounts of federal financial assistance, while the
                           audit burden is eliminated for many entities receiving relatively small
                           amounts of assistance. For example, Pennsylvania reported that this
                           change will still provide audit coverage for 94 percent of the federal funds
                           spent at the local level in the state, while eliminating audit coverage for
                           approximately 1,200 relatively smaller entities in the state.


Broader Risk-Based Focus   The 1996 amendments require auditors to use a risk-based approach to
                           determine which programs to audit during a single audit. The 1984 act’s
                           criteria for selecting entities’ programs for testing were based only on
                           dollar amounts.

                           The 1996 amendments require OMB to prescribe the risk-based criteria.
                           OMB Circular A-133 prescribes a process to guide auditors based not only
                           on dollar limitations but also on risk factors associated with programs,
                           including

                           • entities’ current and prior audit experience with federal programs;
                           • the results of recent oversight visits by federal, state, or local agencies;
                             and
                           • inherent risk of the program.

                           For practical reasons related to the audit procurement process, OMB
                           Circular A-133 allowed auditors to forgo using the risk criteria in the first
                           year audits under the 1996 amendments. Therefore, the risk-based
                           approach will be fully implemented in the second cycle of audits under the
                           1996 amendments, which started with audits for fiscal years ending
                           June 30, 1998, and is currently in progress. When fully and effectively
                           implemented, this refinement is intended to give auditors greater freedom
                           in targeting risky programs by allowing auditors to use their professional
                           judgment in weighing risk factors to decide whether a higher risk program
                           should be covered by the single audit.



Timely Reporting           Under the 1984 act, OMB guidance provided entity management with a
                           maximum of 13 months from the close of the period audited to submit the
                           audit report to the federal government. The 1996 refinements reduce this
                           maximum time frame to 9 months after the end of the period audited. The
                           amendments provide for a 2-year transition period for meeting the 9-month
                           submission requirement.



                           Page 5                                                       GAO/T-AIMD-99-177
                            OMB’s guidelines call for the first audits subject to the revised reporting
                            time frame to be those covering entities’ fiscal years beginning on or after
                            July 1, 1998, and ending June 30, 1999, or after. This means that March 31,
                            2000, will be the first due date under the new time frame.

                            When fully implemented, this change will improve the timeliness of single
                            audit report information available to federal program mangers who are
                            accountable for administering federal assistance programs. The Congress
                            and federal oversight officials will receive more current information on the
                            recipients’ stewardship of federal assistance funds they receive.


Summary Reporting           The 1996 amendments require that the auditor include in a single audit
                            report a summary of the auditor’s results regarding the nonfederal entity’s
                            financial statements, internal controls, and compliance with laws and
                            regulations. This should allow recipients of single audit reports to focus on
                            the message and critical information resulting from the audit. OMB
                            Circular A-133 requires that a summary of the audit results be included in a
                            schedule of findings and questioned costs.

                            In 1994, we reported that neither the Single Audit Act nor OMB’s
                            implementing guidance then in effect prescribed the format for conveying
                            the results of the auditors’ tests and evaluations. At that time, we found
                            that single audit reports contained a series of as many as eight or more
                            separate reports, including five specifically focused on federal financial
                            assistance, and that significant information was scattered throughout the
                            separate reports.

                            OMB Circular A-133 provides greater flexibility on the organization of the
                            auditor’s reporting than was previously provided. Taking advantage of this
                            flexibility, the American Institute of Certified Public Accountants has
                            issued guidance for practitioners conducting single audits that allows all
                            auditor reporting on federal assistance programs to be included in one
                            report and a schedule of findings and questioned costs.



Better Basis for Analyses   The 1996 refinements call for single audit reports to be provided to a
                            federal clearinghouse designated by the Director of OMB to receive the
                            reports and to assist OMB in carrying out its responsibilities through
                            analysis of the reports. The Bureau of the Census was identified as the
                            Federal Audit Clearinghouse in OMB Circular A-133.




                            Page 6                                                      GAO/T-AIMD-99-177
                         In our 1994 report, we noted that data on the results of single audits were
                         not readily accessible and discussed the benefits of compiling the results in
                         an automated database. The clearinghouse has developed a database and
                         is now entering data from the single audit reports it has received. As this
                         initiative progresses, it is expected to become a valuable source of
                         information for OMB, federal oversight officials, and others regarding the
                         expenditure of federal assistance.


Pilot Projects           The 1996 amendments allow the Director of OMB to authorize pilot
                         projects to test ways of further streamlining and improving the usefulness
                         of single audits. We understand that OMB has recently approved the first
                         pilot project under this authority. This first pilot, which was proposed by
                         and will be carried out by the State of Washington, provides for auditing the
                         state education agency and all school districts in the state as one combined
                         entity, rather than having about 200 separate single audits. The Washington
                         State Auditor’s office has submitted a statement for the record that
                         describes in more detail the pilot project.

                         Our preliminary view is that the pilot has the potential to both streamline
                         the audit process and to provide a single report that is more useful to users
                         than the approximately 200 reports it will replace. We fully support testing
                         options for streamlining and increasing the effectiveness of single audits
                         and will monitor this and any other pilot projects that are approved in the
                         future.


                         We are committed to overseeing the successful implementation of the 1996
                         amendments, working closely with all stakeholders in the single audit
                         process and periodically providing information to the Congress on the
                         progress being made on all of the refinements. Mr. Chairman, this
                         concludes my statement. I will be glad to answer any questions you or
                         other Members may have at this time.




(911943)         Leter   Page 7                                                      GAO/T-AIMD-99-177
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