[Senate Hearing 110-456]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-456
 
      SINGLE AUDITS: ARE THEY HELPING TO SAFEGUARD FEDERAL FUNDS? 

=======================================================================

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 25, 2007

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, 
                AND INTERNATIONAL SECURITY SUBCOMMITTEE

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
BARACK OBAMA, Illinois               GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri           PETE V. DOMENICI, New Mexico
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                    John Kilvington, Staff Director
                  Katy French, Minority Staff Director
                      Claudette David, Chief Clerk











































                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Coburn...............................................     3
    Senator McCaskill............................................    17

                               WITNESSES
                       Thursday, October 25, 2007

Hugh M. Monaghan, Director, National Single Audit Sampling 
  Project and Director, Non-Federal Audits, Office of Inspector 
  General, U.S. Department of Education..........................     6
Jeanette M. Franzel, Director, Financial Management and 
  Assurance, U.S. Government Accountability Office...............     8
Daniel I. Werfel, Acting Controller, Office of Federal Financial 
  Management, U.S. Office of Management and Budget...............    10
Mary Foelster, Director, Governmental Auditing and Accounting, 
  American Institute of Certified Public Accountants.............    11

                     Alphabetical List of Witnesses

Foelster, Mary:
    Testimony....................................................    11
    Prepared statement...........................................    70
Franzel, Jeanette:
    Testimony....................................................     8
    Prepared statements..........................................    45
Monaghan, Hugh:
    Testimony....................................................     6
    Prepared statements..........................................    35
Werfel, Daniel I.:
    Testimony....................................................    10
    Prepared statements..........................................   766

                                APPENDIX

David Costello, CPA, President and Chief Executive Officer, 
  National Association of State Boards of Accountancy, prepared 
  statement......................................................    77
New York State Society of Certified Public Accountants, prepared 
  statement......................................................    82


      SINGLE AUDITS: ARE THEY HELPING TO SAFEGUARD FEDERAL FUNDS?

                              ----------                              


                       THURSDAY, OCTOBER 25, 2007

                                   U.S. Senate,    
          Subcommittee on Federal Financial Management,    
                Government Information, Federal Services,  
                                and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, McCaskill, and Coburn.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The Subcommittee will come to order. 
Welcome, one and all. We are delighted that you are here and it 
is nice to see our witnesses. We look forward to your 
testimony. We appreciate your preparation. It is nice to see 
some folks out in the audience, including some people who 
helped us on this Subcommittee on earlier versions when we were 
just planning this hearing and we thank you for joining us, as 
well.
    We are going to have one member of our staff, who I think 
this is her last hearing. She is going to throw us under the 
bus and going where the grass is greener and I just want to say 
before we go any further how much we appreciate your help, 
Claudette David. It is great being a part of your team, so good 
luck and God bless.
    I welcome everyone to our hearing today on single audits as 
they are designed to help us protect and safeguard Federal 
funds. I also want to thank my colleague just arriving, Dr. Tom 
Coburn from Oklahoma--welcome--for his continued support in 
ensuring that the Federal Government is accountable to the 
American taxpayers. I would also like to thank our other 
colleagues who are going to be joining us. I know Senator 
McCaskill, a former State auditor, has a keen interest in this 
issue and is going to be coming on board before long.
    Today, we are going to be discussing a key accountability 
mechanism used by the Federal Government to monitor how States, 
local governments, our universities, and nonprofit 
organizations use Federal funds provided to them to help 
achieve some very important national goals. The Federal 
Government, as we know, sends these entities hundreds of 
billions of dollars each year for programs, a lot of them 
meritorious programs like Head Start, Foster Care, Food Stamps, 
and Pell Grants. Single audits are one of the primary 
mechanisms that the Federal Government uses to oversee those 
funds and how they are used.
    I have been a proponent for a long time of single audits 
because I think the concept makes a whole lot of sense. In 
fact, I was one of the original cosponsors, my friend, back in 
1984--I must be old--when I was serving in the House of 
Representatives. Before 1984, there were multiple Federal 
agencies and auditors stepping over each other to review how 
program funds with Federal dollars were being spent. It was a 
maze of inconsistency with both gaps in coverage and 
duplication of audit coverage.
    The Single Audit Act really is about three things. One is 
encouraging sound financial management, including effective 
internal controls, by those who have received these Federal 
funds, those universities, State and local governments, 
nonprofit organizations.
    The second thing we are trying to do with the Single Audit 
Act is to reduce some of the burden on State and local 
governments, hold them responsible, hold them accountable, but 
at the same time to reduce some of the undue burdens on those 
State and local governments and on nonprofits, including 
universities.
    The third thing we tried to do with the Single Audit Act 
was to promote efficient and effective use of audit resources.
    Well, a lot of progress has been made since the passage of 
the Act over 20 years ago. However, a recent study by the 
President's Council on Integrity and Efficiency contained some 
troubling findings. Notably of the 208 single audits reviewed 
in the statistical sample, more than half were problematic. 
Now, they looked at 208, as I understand it, but there are a 
whole lot--it was many times more audits that were conducted, 
but someone picked 208 of them to look at, to scrub closely.
    Now, of those 208 that were reviewed in detail, more than a 
third were of such poor quality that the results could not be 
relied upon. In my view, this rate of quality is just flat out 
unacceptable.
    The study also noted that the audits of entities that 
expended more than $50 million were of noticeably higher 
quality than those that spent less than $50 million. 
Nonetheless, there appear to be problems pretty much across the 
board and I am convinced that this key mechanism may not be 
meeting the goals that we are intending.
    This hearing will focus on the results of the study and on 
the various roles oversight organizations have in monitoring 
single audits. The hearing will also explore the study's 
recommendations and the potential impact that implementing the 
recommendations could have to help ensure Federal funds are 
safeguarded.
    I believe that it is important to keep in mind as we 
explore this area during this hearing that single audits are 
the key mechanism used to monitor hundreds of billions of 
Federal funds. If the auditors aren't doing their jobs, at 
least in a number of areas, then the risk of those funds being 
misspent increases.
    I take a special interest in this because I was present at 
the creation of the legislation 23 years ago. We had State and 
local governments complaining to us that folks were literally 
stepping over each other auditing Federal funds and it didn't 
make a whole lot of sense and why didn't we simply have a 
single audit that can get the job done. It made a whole lot of 
sense.
    What we found out during the course of the last several 
months is that too many of these audits that are being done are 
poorly done. They are unreliable. They don't inform us as to 
how the money is being spent, how the programs are being run, 
if they are in compliance with the law. There is a huge concern 
that I have given the amount of dollars, hundreds of billions 
of dollars that are involved, that monies are being misspent, 
programs are being poorly run, and we can do better than that. 
And hopefully during the course of this hearing and what is 
going to flow from it, we will do a whole lot better than that.
    Dr. Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Senator Carper and also Senator 
McCaskill, because I think a lot of her emphasis led to us 
having this hearing, one that was discussed in one of our 
markups about the Single Audit Act.
    This reminds me of the Latin quote, ``quis custodiet ipsos 
custodes,'' who will guard the guards, and that is what this 
hearing is really about today.
    As an accountant myself, my least favorite thing was 
auditing, I will have to admit that, but what we have seen in 
this IG report is not just troubling. What it says is there is 
incompetence. There is a lack of oversight. There is a lack of 
direction. And what we intended to accomplish with this is not 
being accomplished when half the audits are so poorly done that 
they are meaningless or they have tremendous flaws within them. 
And the whole goal for this hearing is to really hear the 
details of that, to ask for some explanations, and then I would 
hope that we would promise that we would be back to make sure 
there is improvement.
    Senator Carper and I both are keen on making sure that 
every dollar we spend is spent in the way it was intended, and 
what we see from this sampling is that is not the case. So what 
we had hoped to achieve through your efforts in 1984--gosh, 
that was a long time ago--is not being accomplished. My hope is 
that we learn what we need to do better to be checking on it 
and what GAO and the IGs need to be doing better, and also that 
those that are out there that are receiving Federal funds 
understand this is going to get a lot tougher. You are going to 
have to meet the standards, and if you don't, there are going 
to be consequences.
    We are going to borrow $330 billion from our kids this 
year--$330 billion. We have borrowed right now about $10 
trillion, or close to $10 trillion, and they have got about $79 
to $110 trillion worth of unfunded liabilities. There is no 
excuse for the Single Audit Act not to be working. I am 
committed, and I know Senator Carper is, to make sure that it 
is going to happen and you are going to have to help us make 
that happen. Thank you.
    Senator Carper. Dr. Coburn, thank you very much.
    Before we introduce our witnesses, we have been joined by 
an interesting line-up there in the back of the hearing room, 
Dr. Coburn, as you can see.
    Senator Coburn. I notice that we are protected well.
    Senator Carper. For folks who are following this on 
television, we have been joined by it looks like almost a dozen 
uniformed police officers. I don't know---- [Laughter.]
    Senator Coburn. They are the guards who will guard the 
guards. [Laughter.]
    Senator Carper [continuing]. If they are here for us or 
what, but welcome. We know our police chiefs are here from the 
State of Delaware and we appreciate very much not only your 
presence here in our Capitol today--they are here for other 
meetings--but they are good enough to stop by to say hello.
    Let me just say on behalf of all the folks in Delaware that 
Senator Biden and Congressman Castle and I are privileged to 
represent, thank you for all the good that you do for all of 
us. We are grateful for your service and we appreciate that you 
stopped by. I think they are going to try to get on a 3 o'clock 
train.
    I used to be on the Amtrak Board of Directors and whenever 
there was a close call or we were just finishing up our work in 
the House or the Senate and I am on the run to catch the train, 
if we knew it was going to be close, we would call ahead and 
tell them I was on my way and they would leave without me. 
[Laughter.]
    Senator Coburn. Good for them. [Laughter.]
    Senator Carper. They will leave without you guys, too, so 
you may want to hit the road pretty soon, but it is great to 
see you. Thanks so much for coming.
    Our first witness today--actually, I have gotten more 
biographical details on these witnesses than I have ever seen 
or heard in any hearing I have ever conducted, so I am going to 
go through this, but we are going to do it fairly quickly.
    Our first witness will be Hugh Monaghan. Mr. Monaghan 
serves as Project Director for the National Single Audit 
Sampling Project that is the focus of today's hearing. Welcome. 
Hugh Monaghan is Director of Non-Federal Audits for the U.S. 
Department of Education, Office of Inspector General, a 
position that he has held since January 2000. Based in 
Philadelphia, a suburb of Wilmington, Delaware, he manages all 
aspects of this Office of Inspector General's activities 
relating to audits required to be performed by independent 
auditors engaged by entities funded by the Department.
    Mr. Monaghan began his Federal career in New York, New 
York, in 1971 with the U.S. Treasury Department, being in the 
Customs Service, as I recall, and also worked for the U.S. 
Department of Housing and Urban Development in Atlanta, 
Georgia, from 1976 to 1980. One last P.S. Mr. Monaghan is a 
Certified Government Financial Manager and a graduate of Lehman 
College of City University of New York. He also did graduate 
work in public administration at the CUNY branch of Baruch 
College. That is a mouthful about you, isn't it? That is more 
than I have ever thought we would learn.
    Next we have Jeanette Franzel--welcome, Ms. Franzel is 
Director for Financial Management and Assurance at the U.S. 
Government Accountability Office (GAO). Among her 
responsibilities at GAO are areas such as internal control 
standards, grant accountability, government auditing standards, 
commonly called the Yellow Book--the other Yellow Book, I 
suppose.
    Prior to joining GAO, Ms. Franzel worked in public 
accounting, providing auditing and accounting services to not-
for-profit clients and clients that received government 
funding. Ms. Franzel is a Certified Public Accountant, a 
Certified Management Accountant, and a Certified Government 
Financial Manager. She is also Chair of the American Institute 
of Certified Public Accountants Government Performance and 
Accountability Committee.
    Ms. Franzel has a Master's degree in business 
administration from George Mason University and a Bachelor's 
degree in accounting and Spanish from the College of St. 
Theresa. She has also completed the Senior Executive Fellows 
Program at Harvard University, and prior to her accounting 
career and auditing, she taught elementary school and high 
school in South America, and I am told that you are going to 
present your testimony today in Spanish. [Laughter.]
    You probably could. I will let you interpret for me, my 
friend.
    Next, Daniel Werfel. My testimony here says ``Danny.'' Do 
you go by Danny?
    Mr. Werfel. I do go by ``Danny.''
    Senator Carper. All right. Danny Werfel is Deputy 
Controller and currently serving as Acting Controller of the 
Office of Federal Financial Management within the Office of 
Management and Budget. He is responsible for coordinating OMB's 
efforts to initiate Government-wide improvements in all areas 
of financial management. Mr. Werfel is responsible for 
coordinating the development of Government-wide policy on 
financial accounting standards, grants management, and 
financial systems.
    Mr. Werfel holds a Master's degree in public policy from 
Duke University, a J.D. from the University of North Carolina--
that is an interesting combination. We will let you explain 
that in your testimony--and a Bachelor's degree in industrial 
and labor relations from Cornell.
    And finally, last but not least, Mary Foelster, Director of 
Governmental Auditing and Accounting (AICPA) at the American 
Institute of Certified Public Accountants, where her primary 
responsibility is to address government auditing and accounting 
matters. She oversees the activities of the AICPA Governmental 
Audit Quality Center and staffs both the AICPA Governmental 
Audit Quality Center Executive Committee and her State and 
local government expert panel. In addition to managing the 
activities of the Center and various technical projects, Ms. 
Foelster is also responsible for monitoring and analyzing 
Federal regulatory and legislative developments affecting 
auditing or accounting in the government environment.
    Prior to joining the AICPA staff in 1993, she was in public 
accounting practice for 6 years. She is a graduate of the 
University of Maryland and a Certified Public Accountant.
    I am told that in addition to the statements provided by 
our four witnesses here today, we have two additional 
statements. One, I think, is submitted by the National 
Association of State Boards of Accountancy and the New York 
State Society of Certified Public Accountants. With the 
concurrence of my friend, Dr. Coburn, those statements will be 
made part of the record. Hearing no objection, all right.\1\
---------------------------------------------------------------------------
    \1\ The prepared statements of the National Association of State 
Boards of Accountancy and New York State Society of Certified Public 
Accountants appear in the Appendix on pages 77 and 82 respectively.
---------------------------------------------------------------------------
    That is a lot of wind-up for a pitch for you all to make. 
Again, we are happy that you are here. We look forward to your 
testimony and we look forward to being able to ask some 
questions. Most of all, we look forward to figuring out what 
has gone wrong in what was, I think, a very good idea--single 
audits. What has gone wrong? How can we get it fixed? The 
American people expect nothing less.
    Senator Coburn. Could I jump in here?
    Senator Carper. Yes, sir, please.
    Senator Coburn. I am going to have to leave at 3:15. It is 
not because of anything you all have said, it is a commitment 
that I had. I had this hearing at 2. Most of them noticed I 
came at 2 and left. So I will be submitting a lot of questions 
for the record.
    Senator Carper. OK. Do you want to go right to your 
questions now?
    Senator Coburn. I have them, but I will wait.
    Senator Carper. OK, fair enough. All right. Mr. Monaghan, 
you are on. Welcome.

 STATEMENT OF HUGH MONAGHAN,\1\ DIRECTOR, NON-FEDERAL AUDITS, 
   OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION

    Mr. Monaghan. Thank you, Chairman Carper, Ranking Member 
Dr. Coburn, and Members of the Subcommittee. Thank you for the 
opportunity to testify about the National Single Audit Sampling 
Project that was conducted under the auspices of the 
President's Council on Integrity and Efficiency (PCIE).
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Monaghan appears in the Appendix 
on page 35.
---------------------------------------------------------------------------
    I was Project Director and am here on behalf of Department 
of Education Inspector General John P. Higgins, Jr., who chairs 
the Audit Committee of the PCIE. This afternoon, I will 
summarize the project for you and try my best to keep it to 5 
minutes. My written testimony provides more detailed 
information and I respectfully request that it be included in 
the record.
    Senator Carper. Without objection.
    Mr. Monaghan. This afternoon--as you know, the Single Audit 
Act, as amended, requires an annual financial and compliance 
audit of most State and local government entities and not-for-
profit entities that receive Federal assistance awards. It also 
gives the Director of the Office of Management and Budget the 
authority to prescribe implementing guidance. Under that 
authority, OMB issued Circular A-133, which describes how the 
audit must be conducted and reported on.
    For many years, Federal agencies have conducted Quality 
Control Reviews (QCRs), of single audits to determine whether 
they were properly performed in accordance with the law and 
Circular A-133. However, selections of audits for these QCRs 
were not made based on statistical random sampling. Thus, it 
was not possible to accurately assess the quality of single 
audits overall from them.
    The National Single Audit Sampling Project was conducted to 
fill that void. It had two goals: First, to determine the 
quality of single audits with statistically reliable estimates; 
and second, to make recommendations to address noted audit 
quality issues.
    The project involved conducting and reporting on the 
results of QCRs of a statistical sample of 208 single audits 
randomly selected from over 38,000 single audits accepted by 
the Federal Government for the one-year period ending March 31, 
2004. The project QCRs focused on the audit work and reporting 
relating to Federal awards. Audit work and reporting related to 
the general purpose financial statements was not reviewed.
    For each of the 208 QCRs, we categorized the results in 
three groupings: Acceptable, limited reliability, and 
unacceptable. Acceptable included audits with minor 
deficiencies that did not require corrective action for the 
audit. Audits of limited reliability included those with 
significant deficiencies warranting corrective action to afford 
unquestioned reliance on the audit. Unacceptable audits were 
those with deficiencies so serious that the auditor's opinion 
on at least one major program could not be relied upon, or 
there was a material reporting error or omission.
    Based on the results of the project QCRs performed on the 
208 randomly-selected audits, we estimate that just short of 
half of the audits in the population from which the sample was 
drawn, 48.6 percent, were acceptable. Sixteen percent had 
significant deficiencies, and thus were of limited reliability. 
And 35.5 percent were unacceptable.
    However, while we estimate that significant numbers of 
audits were not acceptable, audits reporting large dollar 
amounts of Federal awards were significantly more likely to be 
of acceptable quality than other single audits. The 208 audits 
we reviewed reported total Federal expenditures of $57.2 
billion. Ninety-two-point-nine percent of this amount, $53.1 
billion, were covered in acceptable audits.
    Our report also describes the kinds of deficiencies we 
found and provides estimates of rates of occurrence. Based on 
our findings, we addressed our recommendations to OMB, 
recommending a three-pronged approach to improve audit quality 
to be implemented in consultation with other key stakeholders 
in the single audit process.
    First, we recommend revisions and improvements in single 
audit criteria and guidance and pertinent auditing standards to 
address deficiencies we noted.
    Second, we recommended that OMB establish minimum 
requirements for training on performing single audits as a 
prerequisite for conducting them and periodic update training.
    And third, we suggested that OMB review and enhance 
processes to address unacceptable audits and not meeting 
established training requirements.
    If these recommendations are adopted, we believe that the 
occurrence of deficiencies can be markedly reduced and 
significant improvement achieved in the quality of single 
audits.
    This concludes my statement. I would be happy to answer any 
questions that you may have.
    Senator Carper. All right, Mr. Monaghan. Thank you very 
much.
    Ms. Franzel, you are recognized for 5 minutes, more or 
less, and if you run a little bit over, that is all right.
    Ms. Franzel. Thank you.
    Senator Carper. But don't go too far over because I want to 
make sure that Dr. Coburn has a chance to ask some questions 
before he has to leave.

     STATEMENT OF JEANETTE FRANZEL,\1\ DIRECTOR, FINANCIAL 
MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Franzel. I will be very careful not to go too far over. 
Good afternoon, Chairman Carper and Dr. Coburn. I am pleased to 
be here today to discuss GAO's analysis of the PCIE's National 
Single Audit Sampling Project. GAO also has a written statement 
for the record, which I would ask to be submitted for the 
record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Franzel appears in the Appendix 
on page 45.
---------------------------------------------------------------------------
    Senator Carper. Without objection.
    Ms. Franzel. Thank you. I would like to commend the PCIE 
and OMB for conducting this important study. The single audit 
is a key accountability mechanism over the use of Federal 
grants. In fiscal year 2007, the Federal Government budgeted 
approximately $450 billion in Federal grants to State and local 
governments. Today, I will provide GAO's perspectives on the 
Single Audit Act, our preliminary analysis of the 
recommendations made by the PCIE, and additional factors that 
we believe need to be considered.
    Congress passed the Single Audit Act in response to 
concerns that large amounts of Federal assistance were not 
subject to audit and at the same time agencies sometimes 
overlapped in their audit efforts. The Act adopted the single 
audit concept to meet both the needs of Federal agencies as 
well as grantees' needs for a single, uniformly structured 
audit.
    The objectives of the Act also were to promote sound 
financial management and effective internal control over 
Federal awards, establish the Uniform Audit Requirements, 
promote efficient and effective use of audit resources, and 
reduce burdens on grant recipients. The 1996 Amendments added 
emphasis on establishing cost beneficial thresholds and 
focusing audit work on programs that present the greatest risk 
to the government.
    As you know, Mr. Chairman, GAO supported the Single Audit 
Act and related amendments. We continue to support the concepts 
and principles behind the Act.
    Regarding the PCIE study, we believe that the PCIE report 
presents compelling evidence that there continues to be a 
serious problem with single audit quality. Over the years, GAO 
and the IGs have identified concerns similar in nature to those 
in the recent PCIE report. As Mr. Monaghan described, the PCIE 
report recommends a three-pronged approach to correcting these 
problems: First, improved standards and guidance; second, 
establishing training requirements; and third, enhancing 
disciplinary processes for unacceptable audits.
    While we support the recommendations made in the PCIE 
report, we believe that a number of issues regarding the 
proposed training requirements need to be resolved. For 
instance, what are the efficiency and cost-benefit 
considerations for providing the proposed training? How can 
mechanisms already in place--for example, the AICPA's 
Government Audit Quality Center and others--be leveraged to 
implement the proposed training? And how will the training 
requirement affect the availability of audit firms that are 
qualified and willing to perform single audits going forward? 
Finally, how will compliance with the proposed requirements be 
monitored and enforced?
    We also believe that two other critical factors that Mr. 
Monaghan mentioned also need to be considered in evaluating the 
proposed actions. The first factor is the rate of problem 
audits by size, with size referring to the dollar amounts of a 
grantee's Federal expenditures, and the second is the 
distribution of single audits by size within the entire 
universe of single audits.
    The PCIE study found that the rate of problem audits was 
much higher for audits of entities expending less than $50 
million in Federal awards than for the larger audits. The PCIE 
data also show that the vast majority of single audits, or 
almost 98 percent, were in the smaller stratum, which covered a 
relatively small dollar amount, 16 percent of the total. 
However, that was also the stratum with the higher error rate. 
So these are important considerations as we go forward and 
think about potential solutions.
    To conclude, we believe that actions must be taken to 
improve single audit quality and the related accountability 
over Federal awards. We are concerned that problem audits may 
provide a false sense of assurance, and frankly, mislead users 
of those reports. We also believe there may be opportunities 
for considering these size characteristics when implementing 
actions to improve the quality of single audits. For instance, 
for a category of the smallest audits, there may be merit to 
considering whether a less complex but more effective audit 
approach could be used for achieving accountability through the 
single audit process.
    Another consideration is strengthening the cognizant agency 
oversight for larger agencies, those that expend large amounts 
of Federal dollars, again, aimed at improving accountability 
over Federal dollars.
    Considering the recommendations of the PCIE within this 
larger context is important in achieving the proper balance 
between risk and cost-effective accountability and good 
accountability. In addition, we believe a larger effort to 
review the overall framework for single audits may be 
warranted. This effort could include answering questions such 
as the following: Is the current Federal oversight structure 
for single audits adequate and consistent across Federal 
agencies? What role can the auditing profession play in 
increasing single audit quality? And do the specific 
requirements in OMB Circular A-133 and the compliance 
supplement, as well as the Single Audit Act, need modernizing?
    Mr. Chairman and Dr. Carper, we will be pleased to work 
with the Subcommittee as it considers additional steps to 
improve the effectiveness of the single audit process and 
Federal oversight of grant funds.
    Ms. Franzel. Dr. Coburn--I am sorry. I just promoted Mr. 
Carper to Doctor. [Laughter.]
    Senator Carper. He leaned over and he said, you just got 
promoted. I told him, I will take it.
    Senator McCaskill. Dr. Carper, good to see you. [Laughter.]
    Senator Carper. General McCaskill, it is nice to have you 
on board today. [Laughter.]
    You are just in time for Danny Werfel. Mr. Werfel, your 
entire statement will be made a part of the record. You are 
recognized. Try to hold it to about 5 minutes, please. Thanks.

STATEMENT OF DANIEL I. WERFEL,\1\ ACTING CONTROLLER, OFFICE OF 
  FEDERAL FINANCIAL MANAGEMENT, U.S. OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Werfel. First, let me begin by thanking Chairman 
Carper, Dr. Coburn, and Senator McCaskill and the rest of the 
panel for having this hearing today and inviting me to speak.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Werfel appears in the Appendix on 
page 66.
---------------------------------------------------------------------------
    The single audit is the primary tool that Federal agencies 
use for overseeing the over $450 billion in grant awards going 
to non-Federal entities annually. Federal agencies rely on the 
single audit to verify that program requirements are being met, 
that strong internal controls for reducing waste, fraud, and 
error are in place, and that recipients are meeting their 
responsibility for reliable and timely financial reporting.
    When these audits are done effectively, they surface 
important issues that result in improved management of Federal 
grant programs. When these audits are of substandard quality, 
Federal oversight efforts are weakened and there is greater 
risk that ongoing improprieties in Federal grant programs are 
not being detected or addressed.
    The National Single Audit Sampling Project issued by the 
President's Council for Integrity and Efficiency and the 
Executive Council for Integrity and Efficiency brings into 
focus significant deficiencies with the manner in which these 
audits are conducted. OMB is committed and prepared to play an 
important role in ensuring that these deficiencies are 
addressed.
    We have already begun to implement the report's 
identifications and identify further areas for improvement. We 
are beginning to draft amendments to OMB Circular A-133 that 
will provide additional guidance to auditors on how to identify 
major programs in their reports, to clarify the requirements 
for sample selections and when audit findings must be reported, 
and to emphasize the need to provide more specific 
documentation of audit activities and findings from major 
programs.
    In addition to the amendments to the OMB Circular, we will 
help facilitate new audit training programs and requirements 
and will explore strategies for strengthening the 
accountability for those auditors who are failing to meet the 
minimum professional standards.
    Beyond the recommendations from the report, we are pursuing 
additional measures to improve the quality and overall 
effectiveness of the single audit process. We want to evaluate 
approaches such as whether a more robust peer review process 
can be used to help ensure that minimum audit standards are 
being met.
    We are also exploring the possibility of expanding and 
leveraging the single audit process to assess improper payments 
within grant programs. If we can leverage the single audit 
process, Federal agencies will have an important tool for 
obtaining cost effective improper payment error measurements.
    We believe the single audit process can be instrumental in 
identifying and correcting noncompliance with laws and 
regulations, lack of internal controls, and other financial 
management deficiencies. We are committed to improving the 
quality of the single audit process, as I have testified today, 
and we will continue working collaboratively with Federal 
agencies, the Inspector General community, GAO, the AICPA, and 
State auditing agencies to accomplish this.
    Thank you again for the opportunity to testify today and I 
look forward to answering your questions.
    Senator Carper. Mr. Werfel, thank you very much.
    Ms. Foelster, you are recognized for 5 minutes. Your whole 
statement will be made part of the record, so please proceed.

STATEMENT OF MARY FOELSTER,\1\ DIRECTOR, GOVERNMENTAL AUDITING 
    AND ACCOUNTING, AMERICAN INSTITUTE OF CERTIFIED PUBLIC 
                          ACCOUNTANTS

    Ms. Foelster. Thank you, Mr. Chairman, Dr. Coburn, and 
Senator McCaskill. I appreciate the opportunity to testify with 
the other representatives on this panel with whom we work 
regularly on improving the quality of single audits. With your 
permission, I would like to submit my written testimony and for 
now would like to summarize what that testimony says.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Foelster appears in the Appendix 
on page 70.
---------------------------------------------------------------------------
    On behalf of the American Institute of Certified Public 
Accountants and its 340,000 members, thank you for the 
opportunity to testify here today. The AICPA shares the 
commitment of the Federal agencies involved in the study on the 
quality of single audits.
    The PCIE report is based on audits that were performed 
primarily in 2002 and 2003, but after this time frame and long 
before the PCIE report was released, the AICPA on its own 
initiative has taken a number of very significant steps to 
improve the quality of these single audits. Indeed, the AICPA 
has been working at least as actively as anyone involved in 
this process to keep the quality of these audits as high as we 
can.
    In recent years, the AICPA has further stepped up its 
commitment by adding new single audit-specific publications and 
single audit training. The AICPA also publicizes common 
deficiencies found by the Inspectors General and through the 
profession in various forums. We have established a semi-annual 
roundtable where we bring all the stakeholders together that 
are involved with these audits--the IGs, OMB, GAO, the AICPA, 
and members of the profession--where we can talk about the 
issues.
    In September 2004, that is almost 3 years before the PCIE 
report was released, the AICPA took its most significant step 
by launching its Governmental Audit Quality Center. The 
Center's mission is to promote the highest-quality government 
audits, which include single audits, and to help CPAs meet the 
challenges of performing these unique and complex audits.
    Center member firms are required to adhere to membership 
requirements that go beyond what they would have to do 
otherwise to perform these engagements. The Center is also a 
resource for best practices. It helps raise awareness about the 
importance of government audits and develops a community of CPA 
firms that demonstrate a commitment to the highest-quality 
government audits. Its website enables member firms to access 
information, guidance, and practical tools whenever they are 
needed. The Center also sends alerts to its members 
electronically with important news and developments. After this 
hearing today, we will be sending an alert to tell them what 
has happened at this hearing.
    The Center's current membership of over 850 audit firms 
audits approximately 83 percent of the total Federal 
expenditures covered in single audits that are performed by CPA 
firms. The Center is also a resource for firms and government 
auditors who are not members. Anyone can access our website. A 
lot of the information is available to the public, and many 
Federal agencies are beginning to recognize this and actually 
give us information when important developments occur so that 
we can post it on our website. We also send electronic alerts 
at times to auditors that are not members of the Center.
    The subject of this hearing is whether single audits help 
to safeguard taxpayer dollars. The answer is an unequivocal 
yes. The report indicates that more than 92 percent of the 
dollars of the Federal grants reviewed were in acceptable 
audits. Their value is undeniable.
    The PCIE report indicates that there are some audit 
documentation and reporting issues, particularly in the smaller 
audits, that need to be addressed. The Subcommittee should be 
aware that those issues do not necessarily negate the benefits 
or outcomes of those audits. This is especially true for those 
audits where the primary issues were with documentation or 
reporting. However, all deficiencies need to be corrected 
regardless of whether they are technical or substantive.
    For many small grantees, the audit is the primary, and in 
many cases the only review of Federal expenditures, and 
compliance with Federal regulations. In addition, audits have 
been shown to be an effective motivation for grantees to 
develop internal controls over their Federal expenditures to 
ensure compliance.
    The PCIE report focuses recommendations almost entirely on 
the auditing profession, but meaningful improvements in single 
audit quality will only occur when all of the key stakeholder 
groups, that is the auditing profession, the procurers of the 
services, and the Federal agencies themselves, are involved in 
the solution.
    The goal should be for all grantees to have robust 
governance structures that support the benefit of audits, 
consider the qualifications of a firm during the hiring 
process, and evaluate the reasonableness of the firm's 
anticipated hours and fees in relation to the work to be 
performed. Until the governance structure of these entities are 
addressed, the quality enhancements that we all seek will be 
much more difficult to attain.
    The PCIE report shows a marked positive difference in the 
quality of the work performed in the larger audits. These 
audits are typically performed by larger firms, which tend to 
have greater internal resources to devote towards this complex 
and unique audit area. Another reason for the difference is the 
increased support by Federal agencies for large grantees and 
their auditors.
    To make further strides in improving audit quality, more 
Federal agency support of the single audit process is needed. 
The AICPA is going to work cooperatively to explore how 
enhancements in the compliance supplement and other potential 
activities that might flow from additional Federal resources 
can improve audit quality.
    We have reviewed the detailed recommendations in the report 
at a very high level regarding criteria and standards and other 
guidance. Seven task forces have been established to review the 
detailed recommendations in the reports and to make appropriate 
enhancements to guidance and standards.
    With regard to continuing education, the AICPA has always 
been supportive of the existing requirements in government 
auditing standards and supports single audit-specific training. 
It is difficult to assess whether the recommendations to 
establish minimum education requirements as a prerequisite for 
conducting single audits and the proposed update training will 
help to resolve the quality issues cited in the PCIE report. We 
first need to better understand the extent to which the 
education of the auditors reviewed in the PCIE study 
contributed either to them being acceptable or not acceptable. 
The AICPA does appreciate that the PCIE recognizes us as a key 
organization to help in assisting development minimum content 
requirements for the training that might be required.
    Finally, the report includes a recommendation to review and 
enhance processes to address unacceptable audits. We fully 
support a robust Federal enforcement process and the Federal 
Government's use of all tools already at their disposal for 
addressing unacceptable audits. This includes the current 
suspension and debarment process as well as the referral of 
auditors performing unacceptable audits to licensing agencies 
and professional bodies for appropriate discipline. Reviewing 
these tools to make them more efficient seems to be an 
appropriate course of action.
    The AICPA is confident that our recent efforts, including 
the creation of our Governmental Audit Quality Center, are 
already beginning to address some of the issues raised in the 
PCIE report. We also looking forward to working with this 
Subcommittee as it continues to monitor these issues.
    Thank you, and I am happy to answer any questions that you 
have.
    Senator Carper. Thank you very much.
    I am going to recognize Dr. Coburn, for some questions to 
start off. He has to leave here in a couple of minutes. We may 
have a vote at 3:15, an amendment to the Amtrak reauthorization 
bill. We will see what the situation looks like. My intention, 
Senator McCaskill, would be to go to you next for questions or 
comments.
    Senator Coburn. Thanks again for your testimony. Nobody 
there disagrees there is a problem. Does anybody disagree there 
is a problem?
    [Witnesses shaking heads.]
    Senator Coburn. OK. A couple of questions based on your 
testimony. There was a suggestion that maybe we ought to make 
the requirements for tier two or smaller grants a different set 
of requirements. Does anybody disagree with that?
    [No response.]
    Senator Coburn. OK. Second question----
    [Comment from audience.]
    Senator Coburn. Well, I am asking them. Senator McCaskill 
has offered to educate us all on this. She knows it and I am 
anxious to learn that, but based on what their testimony was, I 
want to see what----
    Mr. Monaghan. I just wanted to say, Senator Coburn and 
Senator McCaskill, I am testifying on behalf of the President's 
Council on Integrity and Efficiency. It is a group of very 
opinionated folks. They haven't had the opportunity yet to 
consider that specific idea, so I----
    Senator Coburn. Well, how about you personally?
    Mr. Monaghan. My personal opinion really shouldn't be said 
here. Do you want it?
    Senator Coburn. Sure.
    Mr. Monaghan. I think it is worthy of consideration, yes.
    Senator Coburn. OK. Next question, should audit capability 
and demonstration of audit efficiency and demonstration of 
audit capability be a part of the request for any grant? In 
other words, we are doing it after the fact. Why shouldn't that 
be a requirement before the fact for grants?
    Ms. Foelster. I personally think that any time the 
government is giving money to a grantee and asking them to have 
compliance surrounding what they are supposed to do with the 
money, that part of the process of the grantee hiring an 
auditor to audit those expenditures and how they have been 
spent should include some look at the qualifications of the 
firm and whether they have done one of these audits before.
    Senator Coburn. Well, a lot of the grants, there is no 
requirement at all that you demonstrate that, so I am kind of 
going to the lower level. There is $450 billion worth of grants 
and a lot of them don't have--there is a requirement on the 
Audit Act, but there is no demonstration of proficiency before 
you apply for a grant, you have to demonstrate that you have 
either hired or have proficiency to complete the audit. Does 
OMB have any problem with that?
    Mr. Werfel. Well, I think, Senator, that you are correct 
that right now, we don't go to that level of specificity in 
terms of delineating that element of a grant award. Before we 
issue an award to a grantee, though, we do an assessment of the 
financial responsibility of that grantee. We look at their 
ability to carry out their duties as would be indicated in the 
grant----
    Senator Coburn. Except for those that are not grants that 
are mandated through an earmark, right? You don't look at that 
capability when it is a mandate.
    Mr. Werfel. There are cases in which the agency that is 
issuing the earmark will go through a similar type of financial 
responsibility review. But generally, going back to the 
question of auditability, we do not go to that level, but that 
is something that could be worth exploring. As we review the 
issuing of the grant awards, we could focus deeper into this 
question of looking at their capability, their willingness, 
their commitment to procure adequate audit services.
    Senator Coburn. The whole point behind this, this idea of 
the guards guarding the guards, is if somebody knows up front 
that a requirement for receiving the grant is that you 
demonstrate that you have hired proficient auditors from a 
list. What that implies is they know what the requirements are 
and so therefore the grant is given conditioned that you know 
the auditing standard is in there from the start.
    If you take up 92 percent of these as far as the money 
looked OK, that is just $36 billion on the $450 billion that 
may not look OK, and that is pretty worrisome. Thirty-six 
billion dollars would educate a lot of kids or take care of a 
lot of their health care. So I think it is a big problem.
    On the CPA exam, when I said--I didn't pass it all the 
first time, I will admit that in front of this group--the 
auditing portion, but are there questions about government 
audits and the Single Audit Act in the CPA exam now?
    Ms. Foelster. There are likely a few questions----
    Senator Coburn. But not everybody is going to get one?
    Ms. Foelster. Not necessarily. There is such a wide 
spectrum of topics that have to be tested, and these audits are 
very narrow, so that it would be a very limited number of 
questions.
    Senator Coburn. OK. One other thing that you said, Ms. 
Foelster, was that many of them, just because they didn't pass 
the audit test, because there wasn't documentation there. The 
accounting that I was taught, if they didn't document it, it 
didn't happen. And everybody that goes through accounting knows 
that and that documentation is the number one thing to back up 
what the numbers are that you put there. So if they are not 
there, your testimony kind of lessened the impact. You may be 
right, but as far as an accounting standard, that number is 
meaningless unless there is the back-up data there for it, 
correct?
    Ms. Foelster. One of the things that we have been doing 
through our Governmental Audit Quality Center is stressing this 
notion of having to make your documentation so specific that 
someone could come along and look over your shoulder after the 
fact and be able to understand what you have done----
    Senator Coburn. They are supposed to be able to follow the 
trail.
    Ms. Foelster. So the Governmental Audit Quality Center has 
been stressing this with our member firms and even non-member 
firms for the last 3 years.
    Senator Coburn. So as you all have looked at this study, 
how much of it was incompetence of auditors versus negligence 
versus--let me rephrase it. In what was looked at, how much of 
it seemed to be incompetence versus negligence? Does anybody 
want to talk on that?
    Mr. Monaghan. We attributed lack of due professional care 
as an overarching problem for most of the deficiencies and, as 
you know, Dr. Coburn, due professional care is a requirement of 
the auditing standards. I believe GAO in its written testimony 
has defined it rather extensively, and we believe that cross 
the board, it contributed to most of the deficiencies.
    Senator Coburn. But if you are auditing a private firm and 
did that, a publicly-traded company, shareholders would have an 
action against you for that, is that not correct? Ms. Foelster.
    Ms. Foelster. Yes.
    Senator Coburn. That is an actionable failure of an 
auditing firm, correct?
    Ms. Foelster. I don't know that it is necessarily relevant 
that it is a public company or not.
    Senator Coburn. Well, OK. Public or private, the fact is, 
in the private sector, if you have an auditor that does not 
exhibit that standard, that is an actionable item.
    Ms. Foelster. Yes, and we fully support a robust Federal 
enforcement process for these kinds of engagements that are 
found and look forward to working with the agencies to help 
improve that process if it is needed.
    Senator Coburn. OK. Yes, ma'am.
    Ms. Franzel. One of the dilemmas, I guess, that we saw when 
we analyzed the results of the PCIE study was this conclusion, 
which I believe is probably on track, that many of the problems 
were caused by lack of due professional care. What that means 
is the auditors did not take enough care and attention to 
following standards, and we questioned then to what extent 
would improved guidance and additional training cause auditors 
to care more and to do a better job.
    Now, one element of the recommendations could help in that 
the additional training would be a prerequisite, so auditors 
could not do the audits unless they have gone through this 
training regimen, and in that manner you may limit the universe 
of auditors to those who do want to take the time necessary to 
become qualified.
    Senator Coburn. Is there the attitude out there that this 
is not as important as the ones in the private sector?
    Ms. Foelster. My experience in working in this area for 14 
years is that many firms are trying to do this correctly. I did 
many of these audits when I was in practice and they are 
complex. So I think that in many cases, it is just a lack of 
understanding, potentially, of the detailed requirements of the 
OMB Circular and the compliance supplement and all the 
underlying laws and regulations.
    Senator Coburn. So do you think the audit firms that do 
this really don't know the rules that they are----
    Ms. Foelster. Yes, and we gave an example in our written 
testimony of a firm that might have a very wide, diverse 
practice and all of a sudden their local government client gets 
$550,000 and they are thrown into having to understand how to 
do these engagements. The recommendation from the PCIE is that 
you need 16 to 24 hours of training before you can even do 
that.
    Senator Coburn. So why shouldn't we, going back to my 
original question, why shouldn't we say, if you are going to be 
engaged in this, then you have to be certified as having had 
training?
    Ms. Foelster. I think the whole procurement process is 
something that needs to be looked at in terms of these 
engagements.
    Senator Coburn. I will stop at that, and the rest of my 
questions, I will submit.
    I want to thank each of you for being here. My son-in-law 
is going to be real happy that I had Danny Werfel, the 
quarterback, in front of me today---- [Laughter.]
    And I can't wait to tell him.
    Mr. Werfel. I will sign a ball for him.
    Senator Coburn. Thank you. [Laughter.]
    Senator Carper. Thanks, Dr. Coburn.
    We are about 5 minutes into a vote, and I think my 
inclination, if we were to start, we wouldn't get very far and 
I would have to run and vote, as well. I asked Senator 
McCaskill to return once she has concluded that vote and to 
Chair the Subcommittee hearing until I return. I will be back 
about suppertime. [Laughter.]
    No, I won't. I will be back shortly. I should be back in 
about 15 minutes. But I would ask that we stand in recess and I 
expect that Senator McCaskill will be back in 5 or 6 minutes. 
Thank you again very much. We will see you in a few minutes.
    [Recess.]
    Senator McCaskill [presiding.] Thank you for giving me 
enough time to dash over and vote.
    Let me start with talking about peer review. Mr. Monaghan, 
what is your sense of the deficient audit firms--and first, 
before I say that, what I wasn't surprised about in the 
material I read for this hearing was what a great job the 
government auditors were doing. In my experience, I have found 
that government audit work is usually done very well by 
government auditors. It is what they do.
    Whereas with Sarbanes-Oxley and a lot of other pressure out 
there in the marketplace, private CPA firms have either 
primarily had tax practices or they have migrated over into the 
world I call consulting, and frankly, those that had government 
audit shops in terms of contracting government audits, many of 
them have closed because there is not the profit margin there 
that there is in the other areas of the CPA practice.
    So when I was trying to privatize, we were required in 
Missouri to do county audits in about 90 of Missouri's 
counties, the smallest Missouri counties, and I was trying to 
figure out a way to more efficiently and effectively do that in 
terms of travel costs. Of course, I was having to send an audit 
team down there to stay in a hotel to do the field work for as 
long as 2 to 3 weeks, and I thought, well, rather than do that, 
why don't we competitively bid those to private firms, and if 
we could find a firm that wanted to specialize in doing that in 
a smaller region of the State, it would be a win-win for the 
taxpayers.
    And that worked, but there were struggles, and one of the 
things we had to do was we were doing quality control. My 
government auditors, the ones who had done county audits as 
their bread and butter for years and years, were looking at the 
audit work and the product and reassuring themselves--and the 
work papers--and reassuring themselves that the product that 
was being produced was, in fact, a good product.
    Now, I know the kind of stress we had in our shop when it 
was time for peer review. I also know the kind of stress it 
caused me when I had to send my folks out on peer review, 
because inevitably, the auditors that were asked to go to do 
peer review in other jurisdictions were some of my best 
auditors and I hated losing them for the period of time that 
they had to go peer review.
    Tell me what the status is of peer review on the audit 
firms that have been doing this government audit work where you 
found the deficiencies.
    Mr. Monaghan. Senator, we did not look at the peer review 
process other than to try to obtain a copy of peer review 
reports for the project selections that we made. I can tell you 
this. A last-minute change was made in the agenda of an annual 
AICPA conference on peer review that they hold, and on October 
1, I spoke there. They actually changed the agenda for me to 
speak because this is a conference that brings together the key 
folks who are involved in peer review for the AICPA throughout 
the country, and they were very interested in hearing the 
results of this report.
    So I do know they are interested, and that they set up a 
task force--Ms. Foelster can speak to that. I was reading in 
her testimony that they had set up a task force to look at 
enhancements to the peer review process to address the single 
audit area.
    The other part of your question, Senator?
    Senator McCaskill. Well, I guess what I am struggling with 
is I assume the majority of these firms, these private CPA 
firms where these audits were found to be unreliable, I am 
assuming the majority of these are smaller firms?
    Mr. Monaghan. As we indicate in our report, we divided the 
sample into two strata, large and small firms, and there was a 
higher incidence of unacceptable audit work--excuse me, not by 
firms----
    Senator McCaskill. Right.
    Mr. Monaghan [continuing]. But by the size of the audits 
measured by the Federal dollars that are reported in the 
Schedule of Expenditures of Federal Awards. We did not stratify 
the sample in any way other than the dollars reported in the 
Schedule of Federal Awards. So, for example, we did not gather 
information about size of firm and report results by size of 
firm.
    Senator McCaskill. Was there any data that you gathered or 
that we could look at as to the locations of these in terms of 
metro versus rural areas?
    Mr. Monaghan. We did not stratify the sample by geography, 
Senator.
    Senator McCaskill. I think those are a couple things that 
we need to look at. I think that AICPA, you guys need to look 
at it in terms of a professional trade group, in terms of your 
professional organization, and obviously OMB. It seems to me, I 
mean, if I had to just use my instincts, having done a whole 
lot of audits in very small places and a whole lot of audits in 
very big places, that where we struggle to find CPA firms that 
were ready on a dime to do an A-133 audit, it was in the 
metropolitan areas. It was the big firms that had an ongoing 
basis of government clients, whether they be large school 
districts or large universities.
    But when you get into these $500,000 awards to a local road 
district or a local health care center--what about the 
cognizant agencies for these? What kind of responsibility at 
OMB are you instructing the cognizant agency for their 
oversight on the quality of the audit work that is being done 
in the single audit for these smaller awards?
    Mr. Werfel. The cognizant agency has a clearly delineated 
responsibility to do the Quality Control Review, to play this 
role, as I think Senator Coburn said, audit the auditors, or 
police the police, and these Quality Control Reviews are 
carried out.
    One of the things about the Quality Control Review process 
today, though, that we are looking at as a result of this study 
is that each agency approaches Quality Control Review 
differently. Some may in their deliberations and decisions say, 
you know what? Let us go after rural, small audit firms because 
we believe that they are going to lack some of the Federal 
expertise necessary to do a government audit, and an agency 
down the street might say, no, we are going to go look at the 
higher dollar, we are going to look at the big audit firm, and 
really, because it is higher volume, higher dollar, do a deeper 
dive with the bigger audit firm.
    What we don't have is a consistent standard across 
Government, across these cognizant agencies and the Inspector 
Generals within these cognizant agencies, for how we think 
about Quality Control Reviews, and that is something that we 
have started as a result of this study, started discussions 
with the Inspector General Audit Committee to start thinking 
about what parameters might we put into Quality Control Reviews 
so there is more predictability and cohesion as the government 
moves forward, and we might decide that one of the parameters 
is to look at it by rural versus urban, small versus big, and 
therefore make sure we have sufficient coverage of Quality 
Control Reviews. But without those parameters right now, we 
really have each agency individually deciding and I think there 
is some benefit to exploring a more--to still maintain agency 
flexibility, but have some more parameters across government.
    Senator McCaskill. Couldn't you fairly simply in a 
straightforward way just say, the cognizant agency must do a 
random sample of a variety, and maybe just a review read? I 
mean, a lot of these deficiencies would jump out at you if you 
did government auditing work. We are not talking about having 
to go into a complete peer review where you are reviewing every 
work paper and every review, but rather a read and--I don't 
know, how deep did you all go in terms of these studies? What 
was the scope of your survey as it related to the reliability 
of these audits?
    Mr. Monaghan. Senator, for the 208 audits that we reviewed, 
we did a very thorough review of the portion of the audit 
relating to the major Federal programs that we selected. In 
small audits that were selected--most small audits only cover 
one or two or three major programs and----
    Senator McCaskill. Right.
    Mr. Monaghan [continuing]. We looked at every one of them. 
If it were a larger audit and we had more than three programs, 
we randomly selected three and our results are based on that.
    There was an in-depth look at, for each of the selected 
major programs, whether the auditor did what the rules require 
them to do as documented in their working papers.
    Senator McCaskill. So you basically made sure that they 
were following the Yellow Book. Did you actually look at their 
sampling methodology and all of those things?
    Mr. Monaghan. Of the 208, we did look at 50 audits in terms 
of the depth of audit testing. We looked, though, very 
thoroughly for every one of the 208 at the work that was 
performed as documented pertaining to the compliance 
requirements that they are required to do for major Federal 
programs under the rules that OMB sets forth. OMB has a 
compliance supplement that addresses exactly what must be 
addressed in the single audits and we used that as the guide 
post, if you will, for evaluating what was performed by the 
auditor as documented.
    Senator McCaskill. It seems to me that OMB could make a 
decision, and working with GAO and working with Mr. Monaghan's 
group, come up with a straightforward requirement that the 
cognizant agency must do the following in terms of quality 
control. And there are some efficiencies that could be 
gathered.
    For example, in most States, I think, there is someone who 
is doing a single audit for the State Government. Our cognizant 
agency was HHS in Missouri. If we had been asked by the Federal 
Government to provide a review service for agencies in Missouri 
that were receiving Federal funding, there were some 
efficiencies we could gain.
    For example, if we were going in to do a county audit and 
there was a school district there that had had difficulty 
finding competent government auditing services at a reasonable 
price, I think we could in a very straightforward way charge a 
very reasonable amount while the auditors were down there to do 
field work and provide that audit service as long as--we were 
compensated by local governments all the time for petition 
audits. When local governments would petition us, we would go 
in and do a government audit for them and we would charge them, 
and it was a very reasonable amount because, of course, we were 
just doing time and travel expenses. We weren't doing--there 
was obviously no profit involved.
    It seems to me that there are all these government auditors 
out there that could either by helping do these audits on a 
contract basis, as long as they were getting compensated for 
them--you can't do an unfunded mandate--or in the alternative, 
assist with the quality control in terms of a peer review. Has 
any of that ever been discussed in terms of looking at the 
single audit, improving this reliability?
    Mr. Werfel. It has been discussed, both elements. It is 
just that it has been discussed more recently, Senator. The 
results of these studies got the dialogue going with OMB and 
the Inspector General community and the cognizant agencies on 
these issues.
    But I think you are exactly right. If we can integrate 
subject matter expertise on government auditing into both the 
peer review process and the Quality Control Review process, you 
are going to see better results in terms of identifying smart 
things that can be done at the local level to improve these 
audits.
    In my written testimony in particular, even though it was 
not a recommendation in the report, we specifically pointed to 
the peer review process as something that could be 
strengthened. Clearly, the results indicate, when you have in a 
small strata, the small audits, that high incidence of 
unacceptable audits, something is not going right. We feel 
pretty safe drawing the conclusion that something is not going 
right with the peer review process. Either the peer review 
process isn't uncovering problems and then helping to ensure 
that they are being addressed, or there is some kind of data 
communication not being understood, that the peer review 
process is uncovering problems and that is not getting back to 
the cognizant agency and they are not taking action to do 
something about it.
    So we are very serious about looking at the peer review 
process, and your point about integrating government auditing 
expertise into that so that the peer review--I don't know if it 
helps that much if an audit firm that has limited government 
experience is being peer reviewed by another audit firm with 
limited government experience.
    Senator McCaskill. Well, you can't do that.
    Mr. Werfel. Yes.
    Senator McCaskill. You have got to send in people that know 
what they are doing.
    Mr. Werfel. Exactly.
    Senator McCaskill. Well, what we found, and one of the ways 
we kept the cost down, which is another efficiency you could do 
here, is we said to the audit firms we hired to do these county 
audits, we will give you our scope. We will give you our plan. 
We will give you all of basically what a new auditor in our 
office was given in terms of what they needed to do in these 
county audits. So we almost provided the training for them.
    And, of course, once these audit firms began doing these 
audits, and especially with our help at the beginning, they got 
pretty good at it. It is a little bit like if you audit 
somebody four or five times for control, by the time you do it 
the fourth or fifth time, they usually have segregated control. 
So they got it and they started doing these in a pretty 
efficient way at a very low cost to the taxpayers and we ended 
up saving a lot of money for the State of Missouri in terms of 
how those audits were done.
    All those things could easily be done. Has anybody thought 
to call in a group of State audits so far to talk about perhaps 
involving them in solving this problem, because I think the 
capacity is there.
    Mr. Monaghan. Senator, in making our recommendations in our 
report, they were addressed to OMB, but we also recommended 
that they be implemented in concert with other key 
stakeholders, and as I know you know from the report, we 
specifically mentioned----
    Senator McCaskill. Right.
    Mr. Monaghan [continuing]. The State auditors' National 
State Auditors Association.
    Senator McCaskill. Right.
    Mr. Monaghan. You mentioned training, Senator. That is a 
critical component and our recommendation, just to emphasize, 
recommends that there be comprehensive training required as a 
prerequisite, which is essentially what you said you did in 
Missouri, Senator, for any auditor doing a single audit, and 
there is another recommendation in there that I didn't address 
in the testimony that the procurement requirements in A-133 
require that only auditors who have completed the comprehensive 
training can be engaged to do the audit.
    And finally, just one other point, and you mentioned the 
CPAs in the rural areas. Many of us are very sensitive to that, 
and you will note in our last recommendation in the second 
prong in mentioning the delivery of this training, we encourage 
that the training be delivered in ways that enable auditors 
throughout the United States to take the training at locations 
near or at their places of business, including technologies 
such a webcasts, and that was specifically made with in mind 
that you have CPAs that are far away from large cities where 
training might normally be given.
    Senator McCaskill. Does AICPA have specific coordination 
with government auditors in the 50 States to provide CPEs 
particularly in this area?
    Ms. Foelster. We often involve the State auditors in many 
of the activities that we carry out, including our training 
programs. They are often presenters at some of our AICPA 
conferences. I have a contact with the National State Auditors 
Association through their executive director, so we do have a 
lot of interaction with that organization.
    And I would just like to follow back to the peer review 
comment that Hugh had made. I did just want to make clear that 
we do have a task force at the AICPA that has been established 
to look at our practice monitoring program and any enhancements 
that could be made to it as a result of the results of this 
study. So I didn't want that to get lost in the discussion.
    Senator McCaskill. I guess, would it be possible to find 
out, and if so let me know, if, in fact, there are CPE hours 
offered in all 50 States on government auditing?
    Ms. Foelster. Sure, and the State CPA societies offer CPE, 
too.
    Senator McCaskill. Right.
    Ms. Foelster. The AICPA is not the only one that offers 
CPE. Each State society offers CPE and I could certainly find 
out and give you a schedule, high level, of whether they do or 
do not. My guess is because government auditing standards has 
included a requirement for 24 hours of specific training and 
then 80 hours every 2 years that most States are offering some 
sort of training that would meet the requirements of government 
auditing standards.
    Senator McCaskill. I would love to see what is the current 
state-of-the-art tapes that are available on government 
auditing. I will admit in this room that when I became State 
auditor, I had no idea about being an auditor. I was not as 
proficient as I then became after serving 8 years in that job. 
My background was as a prosecutor, not an auditor. And so when 
I found out that I had to have CPE, it was a very sad day for 
me---- [Laughter.]
    Because, of course, I was signing the audits. Even though 
my deputy was a CPA and statutorily could sign the audits, in 
order for my name to appear on them, I had to have a CPE and so 
I had to watch a lot of tapes and they were terrible. These 
were really boring, awful things. It was like taking the worst 
medicine you could possibly imagine for somebody who can't sit 
still, and I have a hard time sitting still.
    So who is producing the state-of-the-art audio-visual 
material for training for government auditors at this point?
    Ms. Foelster. I can just say from the AICPA's perspective, 
I am actually involved in some of the training that we do. We 
do a lot of webcasts where CPAs can actually sign on live 
sitting at their desk at their computer and view an interactive 
discussion of the issues at hand. We do videos. We also have 
group study that is offered through the States. We have self-
study programs that CPAs can get to obtain their CPE 
requirements. So there are all sorts of different venues and 
opportunities for CPAs to get their education.
    Senator McCaskill. Well, I was so incredibly blessed to 
work with auditors who had been doing their work for literally 
decades under many different bosses of many different political 
parties and they stayed at that office because they were the 
consummate professionals. The man who was in charge of the 
single audit in Missouri, who is still there, he could easily 
help probably 99 percent of the audit firms that you found to 
be deficient because he could do this stuff in his sleep.
    And he would probably want me to say that he doesn't think 
OMB is being proactive enough in terms of providing assistance. 
He doesn't believe that OMB has, and I hate to do this to him 
because now his cognizant agency is probably not going to give 
him the extension he needs, and isn't it about that time of 
year---- [Laughter.]
    That he needs for the single audit, and we usually needed 
an extension, minimum usually, but some extension every year. 
But I think he would say if he were here that in his 
experience, which is probably now 25 years of being responsible 
for the single audit--well, it is not 25 years, because we 
haven't had it that long, but since the beginning of the 
requirement, he has been in charge of it, and I think he would 
say that OMB has not been proactive, that they have not been 
available to proactively reach out and force the cognizant 
agencies to provide more oversight in terms of the quality of 
the audits that are being done, particularly those in the 
private sector.
    Whatever paths you all take forward on trying to solve this 
problem, I hope you will continue to keep this Subcommittee 
informed, and I certainly, in my office, have a personal 
interest in trying to be as helpful as I can. I have an awful 
lot of respect for the people that are doing this work and I 
want to be as helpful as possible. Thank you very much.
    Thank you, Mr. Chairman. I stretched to get you here, 
because it is hard for me to be mean to these guys. These are 
people--I can be mean to some witnesses, as you have probably 
noticed, but I want to be nice to these guys----
    Senator Carper [presiding.] And don't be fooled----
    Senator McCaskill. I want to be nice to the auditors.
    Senator Carper [continuing]. There is not a mean bone in 
her body.
    Senator McCaskill, thank you for presiding and for asking, 
I am sure, a lot of good questions.
    I apologize to the Subcommittee. It is rude for the 
Chairman to leave even in the middle of a vote, but the bill 
that we are debating on the floor is a bill that I have helped 
co-author, the Amtrak reauthorization, and the amendment to the 
bill that is up before them right now is language in another 
bill that I wrote, so they needed me to be there for a little 
while to try to help work things out and I think we made some 
progress. I am sure you made progress here, and with Senator 
McCaskill here, you probably didn't miss me at all.
    Let me just come back, and one of the questions I want to 
ask, it seems to me when we talk about the amount of money 
involved in these single audits, I think I have heard the term 
$450 billion thrown around. I understand from your testimony 
that the larger dollar volume audits are generally done pretty 
well. They tend to be more acceptable. The smaller dollar items 
are less acceptable, as it turns out.
    In reading between the lines, and maybe reading the lines, 
I gather that the lion's share of these Federal dollars, if it 
is $450 billion, that the lion's share of the dollars in the 
Federal funds are being audited in a single audit approach in 
ways that are acceptable. They are not degraded. They are not 
unacceptable. Could somebody talk to me about that?
    Mr. Monaghan. Well, the numbers that are presented in our 
tables of the report would indicate a much higher incidence of 
acceptable audits in stratum one, which is the larger dollar 
amounts, and what we did for the 208 audits that we looked at, 
was present a correlation between the groupings and the dollars 
reported in those audits. But each audit is an individual audit 
and there were some in the large strata that were not 
acceptable and there were almost half in the lower strata that 
were. So that should be mentioned, as well.
    Senator Carper. Let me just ask you my question in a little 
different way. Listed in the amount of money involved here is 
$450 billion on an annual basis. Of that $450 billion, can you 
say, given the work that you did on the 208, looking at the 208 
audits, what percentage of the dollars were audited in audits 
that were found acceptable?
    Mr. Monaghan. For the 208 audits that we looked at, of all 
the reported dollars for both strata, it was 92.9 percent that 
were reported in audits that we characterized as acceptable.
    Senator Carper. All right.
    Mr. Monaghan. So the total.
    Senator Carper. Now, out of that 208, the dollar value, it 
was basically that these audits said these programs were OK, 
the monies were being spent in appropriate ways. So in about 
roughly 7 percent, that was not the case.
    Mr. Monaghan. The percentages that we indicate that were 
not in the acceptable category relate to the dollars reported 
in audits that we judged were not acceptable. It does not mean 
that those monies were misspent. It means that the auditing, 
the accountability of those monies was deficient in those 
audits, but not that the money was misspent.
    Senator Carper. Does anybody else want to amplify on this, 
because otherwise I will follow up with my questioning. Ms. 
Franzel, and then Mr. Werfel.
    Ms. Franzel. I do want to caution about that 93 percent, 
and that is because we are talking about apples and oranges 
here, but it is the only thing we really have to go on to give 
us a general feel for dollar coverage. The universe used by the 
PCIE consisted of $880 billion----
    Senator Carper. Help me reconcile the $450 billion and the 
$800-and-some-billion dollars. I don't understand.
    Ms. Franzel. The $880 billion was the total dollar value of 
expenditures in single audits that were accepted during the 
one-year time. There is a lot of double-counting of money in 
that $880 billion, so that is why it is so much bigger than the 
$400 billion or so in grants, because----
    Senator Carper. I am sorry, just start that sentence over 
again. There was a lot of----
    Ms. Franzel. A lot of, I am going to say, double-counting 
of Federal expenditures because in some cases, the money goes 
to the State and then the State gives it to a local government. 
Both the State and the local government are having audits of 
those dollars, and so that is why the universe that was used 
was $880 billion, because that is the total universe of audits. 
That is not the total universe of grant monies.
    So to the extent that for the larger audits, with money 
going to the State and then large chunks going to large cities, 
that money might be getting double-counted. So I just wanted to 
offer a caution, and I know that the statistical methodology 
was not designed to do that sort of conclusion----
    Mr. Monaghan. This gets into a very technical area of 
statistics, Senators. We do, in presenting this data in the 
report itself, and I would give attention to the chart at the 
bottom of page 40 of our report, we do disclose the--Ms. 
Franzel describes it as the double-counting. It is attributed 
to money passing through the State Government. For example, in 
my Department of Education, most of the money going to local 
school districts passes through the State Department of 
Education. It is audited there in the single audit at the State 
Department of Education.
    But the auditing there is limited, for the most part, 
because that money is spent ultimately at the school district 
level, it is audited at the State education agency to see that 
the State education agency is discharging its responsibilities 
for those funds which are ultimately expended at the local 
school district. And it is audited again at the local school 
district level, which is on the second tier, the stratum two of 
these audits.
    Senator Carper. All right. Mr. Werfel, you were going to 
add something to this, weren't you?
    Mr. Werfel. What I was going to add, Senator, is that we 
are taking a look at this from, I think, both angles. Clearly, 
it is encouraging that 93 percent of the awards were covered by 
acceptable audits and that tells us that there are certain 
elements and ingredients of what we are doing in those 
situations that are working. The cognizant agency reviews, the 
quality assurances that we are doing, the peer review process 
is having an impact and assuring good quality audits.
    On the other side of that, when we deal with these big 
dollars, and my office has testified on many cases in front of 
this Subcommittee that in the Federal Government, even a 1 
percent or 2 percent error rate is billions of dollars, and in 
this case, if you look at the $450 billion, just to keep it 
easier, and you look at 7 percent of that, you are over $30 
billion.
    So we are very concerned about that and what we want to do 
is see if we can start to bridge some of the good things that 
are going on in the 93 percent and make sure they are spreading 
into the 7 percent. The 93 percent tells us we can do this. We 
can sustain a single audit process with acceptable audits. The 
question that we have now is how do we start to close that gap, 
because a 7 percent error rate, if you will, is unacceptable to 
us and we want to try to minimize that as much as possible.
    Mr. Monaghan. Senator, I also think it is important, since 
this testimony is going on the record, to emphasize that for 
those projections, there were no projections made to the 
universe for the dollars. Our report reported that for the 208 
that we looked at, whereas for the numbers of audits, those 
were statistical projections. We used a technique called 
attribute sampling to assess the quality of the audits. We did 
not do estimation sampling to project to the entire universe 
the dollar effect. That would have required a much larger 
sample than we were able to perform.
    Senator Carper. All right. Thank you. Before we move on, I 
have another question I want--in fact, several questions. 
Before we move on, this is my understanding for this 
discussion. Out of this, we will say it is $450 billion, not 
$880 billion, but out of the $450 billion, in terms of dollar 
volume, a little more than 90 percent appears to have been 
audited in programs that the audits were found acceptable. 
Close to 10 percent were not, and as Mr. Werfel suggested, that 
is no small amount of money.
    I am still confused on this. If you actually looked at the 
number of audits out of the 208 that were done, was it roughly 
half of those audits were just unacceptable for just one reason 
or another, or over a third?
    Mr. Monaghan. There are significant differences between the 
large audits and the small.
    Senator Carper. The number 35 percent sticks in my mind 
from your testimony.
    Mr. Monaghan. Yes, it is. Senator, you are absolutely 
correct. For both strata together, the number of unacceptable 
audits were 35.5 percent. For some of those in stratum one, 
they were unacceptable because of--this gets very technical--a 
material reporting error that was made where the auditor 
erroneously said that they audited a major program as such but 
had not, and we considered that unacceptable. It may have been 
a very simple mistake, but in the end, the only product that 
the user of an audit uses is the report itself. So they may 
have relied on that mistaken reporting. When you bore down into 
the data that we have, in stratum one, the audits that are 
purely substandard as opposed to just with the material 
reporting errors are 14.6 percent of that strata.
    But to be simple, overall, for the entire sample, a little 
more than a third of the audits were unacceptable. There was an 
additional 16 percent that were of limited reliability, and 
48.6 percent that we found to be acceptable.
    Senator Carper. Why is there this apparent incidence of 
larger volume audits, fewer problems, smaller dollar volume 
audits, bigger problems. Ms. Foelster.
    Ms. Foelster. Well, I think, generally, the ones that have 
the higher-volume Federal expenditures running through them, 
the entities themselves probably have stronger governance 
structures, so when they are actually going through the hiring 
process with the firm, they have procedures in place to ensure 
that the firm has the appropriate qualifications. I think, as 
Mr. Werfel said, that there is more oversight of those entities 
by the Federal agencies themselves monitoring not just the 
grantee, but also the auditors through the QCR process. And 
finally, those firms that do those engagements are likely to be 
larger, have more staff and resources to have the ability to 
ensure that they do understand all the rules and requirements 
for doing these engagements.
    Senator Carper. Anybody else on this point?
    Mr. Werfel. The only thing I would add, Senator, is that 
from our experience, from OMB's vantage point, there is always 
a tradeoff when you do things on a risk management basis and 
you focus additional energy and effort into the higher dollar, 
higher volume areas. That is--we believe that is the right 
thing to do. It is a smart thing to do. You get a better return 
on investment for the taxpayer. But as you shift resources into 
that higher-risk environment, you are by definition shifting 
resources and attention away from the lower-risk areas and the 
lower-dollar areas.
    What this study, I think helps us see and crystallizes for 
us is that tradeoff in action. We see a lot of the agencies 
really digging deeper and doing more due diligence with respect 
to the quality of audits in the higher dollar volume areas. 
What I think we need to think about going forward, and I think 
GAO and Ms. Franzel's testimony does a good job of teeing up 
the issue if there is a better framework out there so as we 
transfer resources and focus resources, as I think we should, 
into the higher-risk areas, is there a framework that we can 
establish better in the lower-risk areas that can ensure better 
results, and I think that is the challenge that we have coming 
out of this report.
    Senator Carper. OK. Thank you for those responses. Senator 
McCaskill, did you want to jump in here again?
    Senator McCaskill. No. Basically, I think the testimony is 
pretty clear. We have got work to do and I think this has been 
a wake-up call. We have learned that just because there has 
been an audit doesn't mean that we should rest our heads on the 
pillow at night assuming that the audit has accomplished its 
goal. The helpful thing about this study is that we now know a 
lot more about where we need to be focusing and auditors are 
really good at determining where is high risk.
    So nobody can have the excuse when we revisit this in 18 
months or whenever we come back to it that all the stakeholders 
now don't understand that there is a risk that has been 
identified, and I know that there are mechanisms in place, 
particularly if you reach out to State and local government 
auditors to be helpful with this. I think that could really be 
the key for the Federal Government to do this effectively, and 
I will say that as bias, I am not sure that the Federal 
Government always does that reaching out to local and State 
officials as aggressively as they should. There is a tendency, 
I think, sometimes for all of us that hang out up here to think 
that we know best and there is a great pool of talent out there 
that is waiting to be helpful on this, and I think if we 
harness it, we can do it more effectively and more efficiently.
    So I just thank all of you for your testimony today. I 
think it has been very helpful.
    Ms. Foelster. Senator, could I just quickly add, I wanted 
to say that we have established seven task forces at the AICPA 
to deal with all the specific recommendations and we are 
inviting someone from the State audit community to participate 
on every single one, including CPE. So if that contact that you 
mentioned that has experience with training is available as a 
resource, I would love to get that name from you.
    Senator McCaskill. That is great. He will remind me that I 
can't tell him what to do anymore, but I will definitely call 
him.
    Ms. Foelster. OK. Tell him that we are looking for 
volunteers----
    Senator McCaskill. And frankly, there are a number of 
people there that I think could be very helpful. So I will 
reach out to them and make sure that they are participating. 
You will find, Mr. Chairman, that one thing that auditors do, 
they take audit recommendations more seriously than people who 
don't audit, because they are all very frustrated because they 
issue their audit findings and when they get ignored, it is 
very frustrating. So I have a feeling that this particular 
group will take this seriously and will make some progress, so 
thank you all.
    Senator Carper. Thank you, Senator.
    A couple more questions. Let me just ask, and I think this 
would be for Mr. Werfel----
    Mr. Werfel. Senator, my staff has been teasing me. I think 
I misspoke at the beginning. I was a little nervous and my 
throat constricted. It is actually ``WER-fell.''
    Senator Carper. My staff has underlined ``Wer,'' and you 
said ``Wer-FELL,'' so---- [Laughter.]
    Mr. Werfel. I finally got the courage to correct you. It 
only took about---- [Laughter.]
    It only took about 90 minutes, but----
    Senator McCaskill. By the way, the other thing you need to 
know about auditors, they don't loosen up easily. [Laughter.]
    It takes a little bit. They take this stuff really 
seriously.
    Senator Carper. You seem to have gotten over that.
    Senator McCaskill. Well, I was not an auditor by trade, but 
they take it all very seriously, as they should.
    Senator Carper. All right. Well, let me just say to Ms. 
Franzel, while changing accents on the syllables, did you want 
to stay with ``Fran-ZELL,'' or----
    Ms. Franzel. ``Fran-ZELL'' is the correct pronunciation.
    Senator Carper. Good. All right, Mr. Werfel, are you 
concerned that the audit quality problems that were cited in 
the PCIE study might either be masking or leading to improper 
payments, something this Subcommittee is interested in, in some 
of these programs? And a second sort of follow-on to that would 
be, what have you all been doing at OMB to follow up on any 
findings by the cognizant agencies?
    Ms. Franzel. The first question, I think, is a very 
important one, Senator. The Improper Payments Information Act, 
as you know, is a very challenging law to implement and the 
single audit happens to be one of the tools that agencies use, 
and they use it in two key ways. The first is one of the first 
things the Improper Payments Act asks agencies to do is to 
designate high-risk programs versus low-risk programs, and the 
high-risk programs are the ones where agencies are going to 
invest time, energy, and resources into tracking and improving. 
For the low-risk ones, agencies going to divert energy away 
from those for improper payment purposes. And the single audit 
findings and what we learn through the single audit is critical 
to helping agencies decide what is high-risk versus what is 
low-risk. So to the extent the quality of the single audits are 
substandard, I think diminishes the agency's ability to 
distinguish between high- and low-risk programs.
    Second, when agencies go out and measure improper payments 
for programs, and when they learn what these error measurements 
are, they want to understand what the root causes of those 
errors are. And so they use that measurement approach to do so. 
But it is not the only tool they have to figure out what are 
the root causes of error. The single audit in many cases 
provides a much deeper dive. You really get down to see in this 
case, for this locale and in this scenario, here is how the 
payments were paid out improperly. And while that individual 
case isn't a statistically national estimate, it does inform on 
whether or not the right corrective actions are in place to 
drive improper payments lower for the program as a whole.
    So with this critical role that this Single Audit Act 
plays, if we are seeing deficiencies in the way it is being 
carried out, we are concerned that, as your question posits, 
that we are seeing--we will see weaknesses in the ability for 
agencies to implement the important law of the Improper 
Payments Act.
    Senator Carper. OK. Good enough.
    Mr. Werfel. And you had a second question.
    Senator Carper. The second question was I had asked what 
have you all been doing at OMB to follow up on any findings by 
the cognizant agencies.
    Mr. Werfel. Well, there are several things--the way I am 
going to start thinking about OMB's role with respect to the 
single audit might be our approach pre-this study and post-this 
study, because I think we need to transition into a different 
approach based on these results.
    Before this study, what we did and what we continue to do 
is look at programs at a higher level through things like the 
Improper Payments Initiative. We are requiring agencies to 
measure their error rates, give us their corrective actions. We 
monitor those, we hold them accountable for those, and we see 
the results of those going down throughout the year.
    The same thing with the financial statement audit. With the 
financial statement audit, we have taken a very direct role in 
holding these agencies accountable under the President's 
Management Agenda. We get every agency's corrective actions in, 
and in some cases, those relate directly to the issues that the 
single audit is bringing up--grantee oversight, in some cases, 
concerns with how agencies are overseeing grants, enter into 
financial statement audits. So OMB is there holding agencies 
accountable and pushing for improvements, and we have seen 
improvements at agencies such as the Department of 
Transportation and the National Science Foundation. We have 
seen them over the last 3 or 4 years strengthening their 
oversight.
    What we haven't done historically is take a more broad 
global view of audit quality that this study implicates is 
necessary, and I think Mr. Monaghan was telling earlier about 
all the different requirements that exist for the single audit. 
We have a 1,000-page compliance supplement. We have Circular A-
133. We have a lot of detailed requirements telling auditors 
how to do audits. What we don't have today is a lot of guidance 
on telling cognizant agencies how to validate the quality of 
the audits being conducted. What we have is that we have--A-133 
does require the cognizant agencies to do these quality 
assessments or Quality Control Reviews, but we don't have 
specific parameters for how they do it. There is a lot of 
flexibility that the agencies have.
    And so we anticipate continuing that flexibility, but at 
the same time building in parameters for the Quality Control 
Review process and working more closely in the future with the 
Inspector General community. We have already started dialogue 
with the PCIE and with the Audit Committee about what we can do 
more globally with Quality Control Reviews. What role can OMB 
play to say, we have a concern with audit quality. We want the 
cognizant agencies to step up their game, so to speak, in terms 
of looking at audit quality. OMB has to play a role in 
establishing the parameters for how we do that going forward.
    So looking ahead, I think that is really where you will see 
OMB insert itself and enhance its role in the single audit 
process, is in building a stronger and more cohesive approach 
to Quality Control Reviews.
    Senator Carper. Thank you, Mr. Werfel. I am going to stick 
with you for a moment, if I could. This may be the last 
question. I am supposed to be someplace else at 4:30 and they 
want me to come to the Cloakroom right now, so we will just ask 
you one more question. But if somebody else wants to chime in, 
you are welcome to.
    As I recall, there were maybe three recommendations for 
follow-up in terms of what we have learned in this process from 
this PCIE study. The first was to improve the guidance related 
to single audits. The second is to establish specialized 
training requirements related to single audits. And let me just 
stop right there and say, on this panel, do you all agree on 
the first one? Is there any disagreement on the first one?
    Mr. Werfel. We agree with that.
    Senator Carper. OK. On the second, to establish specialized 
training requirements related to single audits, any 
disagreement or qualification of support for that one? Yes, 
ma'am.
    Ms. Franzel. We did raise several questions that we think 
need to be resolved----
    Senator Carper. Do you want to mention those, please?
    Ms. Franzel. Yes, I certainly can. First of all, are we 
going to assume status quo right now with the single audit 
procedures, and if so, then that does imply that all auditors, 
all current auditors need to be trained. And so questions such 
as which auditors in each firm need to be trained, etc., need 
to be worked out because it is a very large task and we do want 
it to be effective, so we have some implementation questions 
like that that would need to be worked out--cost-benefit, 
practicality questions, etc., which we discussed here.
    But the big issue is before we jump into the training--we 
do support the training recommendation and we do support the 
concept of using it as a prerequisite--but if there are going 
to be major changes in the process within the next couple of 
years, I think we need to sequence this so that it is effective 
and efficient and cost beneficial.
    Senator Carper. Any other qualifications of support?
    Ms. Foelster. I would say that I would agree with what Ms. 
Franzel just said.
    Senator Carper. You do? Entirely?
    Ms. Foelster. Yes.
    Senator Carper. All right.
    Ms. Foelster. There are a lot of questions, and it is hard 
to say who is against training. Training is a wonderful thing. 
We know that there are over 5,000 CPA firms alone that do the 
work, so we would need to figure out how it would be 
implemented in a cost-beneficial manner.
    Senator Carper. OK. Now, the third recommendation--this is 
a question again for you, Mr. Werfel, but others are welcome to 
chime in. Regarding the third recommendation, the PCIE asked 
you work with the AICPA and NASBA. What is NASBA?
    Mr. Werfel. The National Association of State Boards of 
Accountancy.
    Senator Carper. I don't like acronyms too much, and some of 
these acronyms I have heard of. That is a new one to me, but 
thank you for telling us what it is.
    But the PCIE asked you to work with the AICPA and NASBA to 
identify ways to further audit quality, and they also, I think, 
said they wanted you to review the suspension and debarment 
process. And they were to consider instituting sanctions to be 
applied to auditors for unacceptable work or not meeting 
training requirements. How do you react to those 
recommendations?
    Mr. Werfel. Well, we certainly support entering into a 
dialogue on how to improve accountability. Earlier, Senator 
Carper asked the question of whether we perceived the problem 
was a competency issue, a lack of clarity issue, and I will 
paraphrase him, an incentive issue. He indicated the question 
of because these auditors are receiving government funds, they 
feel they can do less of a due diligent job. Is that part of 
it?
    And this last recommendation--I think the first two 
recommendations, improving the clarity of the guidance and 
training, get at his first two questions, the competency issue 
and the clarity. But the last question in terms of incentives, 
we think it is absolutely important to hold these auditors 
accountable. We are concerned, and have issued our written 
concerns to the Inspector General community, about jumping 
right to a sanctions program. Our experience tells us that 
sanctions programs are very expensive to get up and running. 
You need a lot of infrastructure. There is a tremendous amount 
of due process that you need to put in place before you can 
impose something like a civil penalty against a public entity 
like an independent auditor.
    So what we would prefer to do and what we think should be 
explored first is looking at the suspension and debarment 
process, which basically is a list of, in this case, auditors 
that would not be able to engage in further Federal work 
because it has been found that they have been involved in 
substandard work product. That suspension and debarment 
process, we believe is not working as well as it can today. I 
think the evidence of this project certainly points to a 
problem with holding auditors accountable for quality work.
    The key with fixing the suspension and debarment process 
is--and I think one of the concerns with it is it tends to be a 
bureaucratic process. Even that tends to be an expensive 
process that agencies will shy away from, seeing the mountain 
of paperwork they have to go through to use it. But that 
paperwork is important because it is due process and it is 
these elements that are needed.
    So again, it is a balance that we have to strike, I think, 
in terms of streamlining and improving the bureaucratic nature 
of the suspension and debarment process while at the same time 
not compromising due process, and that is not an easy task to 
do, but I think that it is probably the most effective one that 
we can take right now from a cost-effective standpoint and to 
strengthen accountability, because I do think that is key.
    I think the auditors in the field that are doing this work, 
whether in a rural area or urban, whether big dollars or small 
dollars, have to have that sense that substandard work is going 
to have a consequence, and the consequence of being put on this 
list is pretty severe. It means that they do not have access to 
further government work, which affects them in their pockets, 
which is important.
    And right now, we would support looking at that process 
together with all the different acronymed agencies and entities 
that you mentioned and figuring out what might work. But it is 
not an easy question to answer because of the tradeoff between 
due process and all these--and streamlining.
    Senator Carper. Yes, ma'am. Ms. Franzel.
    Ms. Franzel. We have heard through anecdotal evidence that 
the current process is not implemented consistently by the 
agencies, and so there is probably room for improvement in the 
current process. Some agencies have just said this is too hard, 
we won't do it, and others are out there pursuing it. So to the 
extent that current process can be improved, perhaps auditors 
can have the sense that their work will be looked at and it 
does matter to do a quality job.
    Of course, we would prefer to see all of this preempted by 
a good quality assurance and quality review program rather than 
trying to catch it at the back end. So we think that is also 
very important, a consistent approach by the agencies in 
overseeing the quality of these audits, because that is also 
another area where we are hearing anecdotal evidence that the 
agencies are handling oversight of the audit process 
inconsistently and then the enforcement process inconsistently.
    Senator Carper. All right. Anybody else on this point?
    [No response.]
    OK. Let me just conclude with this. I want to thank the 
members of our staff who have put together the hearing today. 
You all have done a very nice job and I want to thank you on 
behalf of our Senators. We very much appreciate each of you 
being here, as well.
    I thought I knew something about this, but I have learned, 
in preparation for the hearing today, I have learned some 
things here today. There is a fair amount of money at risk. 
Even though maybe it is only 7 percent of $450 billion--only 7 
percent of $450 billion, it is a lot of money and it would be 
over $30 billion. We know it is not all at risk, but some of it 
may be.
    As I like to say, if it isn't perfect, make it better, and 
clearly we have an opportunity to make these audits better and 
make sure the money is being well spent, and frankly, just 
making sure that the programs are being appropriately run by 
these various nonprofit agencies or whoever is getting the 
money to use.
    As I mentioned during the hearing, this Subcommittee has 
asked GAO to do an in-depth examination of the PCIE report and 
related issues. We plan to continue to pursue these issues and 
we would like to continue to work with our witnesses, now that 
we know how to pronounce your names---- [Laughter.]
    To get the reforms we discussed today moving in a forward 
direction.
    The hearing record is going to be open for a couple of 
weeks, 2 weeks, in fact, for the submission of additional 
statements and questions. I just ask your help. When you get 
the questions that are going to be submitted in writing, try to 
provide prompt responses to questions, whether from the 
Chairman and Ranking Member or from other Members of our 
Subcommittee who were here or not.
    With that having been said, I think we are going to call it 
a day and I am going to go back to work. This has been 
enjoyable and I think highly informative, and I think 
important, as well. Thank you all.
    The hearing is adjourned.
    [Whereupon, at 4:28 p.m., the Subcommittee was adjourned.]




































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