[Senate Hearing 113-409]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-409

 
                      OVERSIGHT OF SMALL AGENCIES

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

                                HEARING

                               before the

                     SUBCOMMITTEE ON FINANCIAL AND
                         CONTRACTING OVERSIGHT

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 10, 2014

                               __________

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                  Gabrielle A. Batkin, Staff Director
               John P. Kilvington, Deputy Staff Director
               Keith B. Ashdown, Minority Staff Director
                     Laura W. Kilbride, Chief Clerk
                   Lauren M. Corcoran, Hearing Clerk


          SUBCOMMITTEE ON FINANCIAL AND CONTRACTING OVERSIGHT

                       CLAIRE McCASKILL, Chairman
CARL LEVIN, Michigan                 RON JOHNSON, Wisconsin
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          MICHAEL B. ENZI, Wyoming
MARK BEGICH, Alaska                  KELLY AYOTTE, New Hampshire
TAMMY BALDWIN, Wisconsin

                 Margaret Daum, Majority Staff Director
                 Rachel Weaver, Minority Staff Director
                       Kelsey Stroud, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statement:
                                                                   Page
    Senator McCaskill............................................     1
    Senator Johnson..............................................     3

                               WITNESSES
                        Thursday, April 10, 2014

Hon. Peggy E. Gustafson, Inspector General, U.S. Small Business 
  Administration.................................................     4
Hon. Osvaldo L. Gratacos, Inspector General, Export-Import Bank 
  of the United States...........................................     6
Hubert Sparks, Inspector General, Appalachian Regional Commission     7
Michael G. Carroll, Acting Inspector General, U.S. Agency for 
  International Development......................................     9
Beryl H. Davis, Director, Financial Management and Assurance, 
  U.S. Government Accountability Office..........................    11

                     Alphabetical List of Witnesses

Carroll, Michael G.:
    Testimony....................................................     9
    Prepared statement...........................................    45
Davis, Beryl H.:
    Testimony....................................................    11
    Prepared statement...........................................    50
Gratacos, Hon. Osvaldo L.:
    Testimony....................................................     6
    Prepared statement...........................................    35
Gustafson, Hon. Peggy E.:
    Testimony....................................................     4
    Prepared statement...........................................    27
Sparks, Hubert:
    Testimony....................................................     7
    Prepared statement...........................................    40

                                APPENDIX

Additional statements submitted for the Record:
    Jon T. Rymer, Inspector General, Department of Defense.......    62
    Mary L. Kendall, Deputy Inspector General, Department of 
      Interior...................................................    66
    Christy L. Romero, Special Inspector General, for the 
      Troubled Asset Relief Program..............................    68
Responses to post-hearing questions for the Record:
    Ms. Gustafson................................................    78
    Mr. Gratacos.................................................    83
    Mr. Sparks...................................................    86
    Ms. Davis....................................................    90


                      OVERSIGHT OF SMALL AGENCIES

                              ----------                              


                        THURSDAY, APRIL 10, 2014

                                 U.S. Senate,      
        Subcommittee on Financial and Contracting Oversight
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:53 a.m., in 
room 342, Dirksen Senate Office Building, Hon. Claire 
McCaskill, Chairman of the Subcommittee, presiding.
    Present: Senators McCaskill and Johnson.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Good morning. I want to thank all of our 
witnesses for being here.
    I apologize that a vote interfered with me getting here 
promptly at 10:30. I saw Senator Johnson going to vote just as 
I was leaving the chamber. So I am sure he will be here 
momentarily, and I will go ahead and begin with my opening 
statement.
    This hearing will now come to order.
    We are here today to discuss the oversight of small Federal 
agencies, commissions and other entities.
    There are at least 41 different entities that currently do 
not receive oversight by an Inspector General (IG). Each of 
these agencies has a budget that sounds small when you compare 
it to the Federal Government's budget of $3.5 trillion. But, if 
you add it all up--and we are talking about well over a billion 
dollars in budget authority every year that has virtually no 
oversight--$1 billion is not small, even by Washington 
standards.
    When there is no oversight and accountability, money gets 
wasted and mismanagement goes unaddressed. At the National 
Mediation Board (NMB), for example, the Government 
Accountability Office (GAO) recently cited a number of 
management challenges, many of which are the types of 
challenges generally identified and tracked by an Inspector 
General.
    For example, NMB contracts have external auditors to review 
its annual financial statements, but the auditors are limited 
in scope only to the areas they are specifically hired to 
evaluate.
    When GAO asked the NMB what sort of process they had in 
place for addressing the auditors' findings and 
recommendations, NMB officials said they had no formal process. 
Instead, they just assumed that any deficiencies cited by the 
auditors would get resolved sometime before the topic was 
reviewed again.
    At the Federal Mediation and Conciliation Services (FMCS), 
which also has no statutory relationship with an IG, it took 
whistleblowers to uncover gross mismanagement. To their credit, 
the Federal Mediation and Conciliation Services did take these 
concerns to the Inspector General for the National Labor 
Relations Board (NLRB) and asked that office to investigate.
    The NLRB IG generally substantiated claims that FMCS was 
abusing its purchase card account to pay for employees' home 
Internet service without proper controls and appeared to have 
paid holiday bonuses to its building's custodial employees with 
checks from the purchase card account, among other problems.
    I think most of the folks at these agencies are hardworking 
people just trying to do their jobs. But, when there is no 
independent Inspector General asking any questions, problems 
can be missed or ignored. And, when there is no oversight, 
those problems have a tendency to fester and build and never 
get resolved.
    Some small agencies actually do have IGs to oversee them, 
but a small agency is going to have an even smaller IG. Some IG 
offices are as small as one person, and that presents its own 
set of issues and problems.
    For example, small IG offices may lack the resources 
necessary to conduct management and program oversight because 
of the number of required audits they have to conduct by law. 
IGs are required to conduct information security audits 
annually.
    This is obviously a serious concern, and I do not want to 
minimize it. But the result of these required audits is that a 
small IG office, through no fault of its own, simply may not 
have the resources to provide adequate oversight of the 
agency's programs and expenditures.
    Based on these concerns, I have begun to work on 
legislation to address the need for more efficient and 
effective oversight for small agencies. The Subcommittee has 
been working on a draft which was circulated to you before this 
hearing. I look forward to hearing your thoughts on these 
ideas.
    I want to work through this process together. The goal here 
is strong oversight of every Federal dollar. And you are the 
experts, so I welcome your feedback.
    The small agencies under discussion today may be small 
potatoes in the vast Federal Government. I doubt that anyone 
who is not in the rail or airline industry knows what the 
National Mediation Board does or how it differs from the 
National Labor Relations Board. I am sure that unless you are 
president of a unionized company or a union leader you do not 
know what the Federal Mediation and Conciliation Service is.
    But I also believe that it is at these small agencies that 
effective oversight can make a huge difference. This is low-
hanging fruit.
    I thank the witnesses for being here. I really appreciate 
having the opportunity to convene a panel of professionals who 
represent a wide swath of government oversight. The witnesses 
here today represent a diverse spectrum of IG offices. And we 
will also hear from the GAO, which sets the gold standard for 
oversight though its own work and by developing the government 
auditing standards, known by us that have a lot of affection 
for the audit world as the Yellow Book.
    I look forward to the witnesses' testimony and our 
discussion. Senator Johnson.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Madam Chairman. I appreciate 
your holding this hearing.
    I, like you, have a great deal of respect for the type of 
information the Inspectors General provide to Congress, to give 
us the information to hopefully write good legislation, to make 
this government efficient. So I am just looking forward to the 
testimony from the witnesses. Thanks.
    Senator McCaskill. Thank you, Senator Johnson.
    Let me introduce the witnesses, and then we will proceed 
with testimony.
    Peggy Gustafson is the Inspector General for the Small 
Business Administration (SBA) and the Chair of the Legislation 
Committee of the Council of Inspectors General on Integrity and 
Efficiency (CIGIE). Prior to becoming Inspector General, Ms. 
Gustafson was my general counsel, where she wisely advised me 
on oversight issues and helped write legislation that has 
significantly strengthened the Offices of Inspectors General 
(OIG). From 1997 to 2007, Ms. Gustafson was my general counsel 
when I served as State Auditor of the State of Missouri.
    Osvaldo Gratacos. Close?
    Mr. Gratacos. Close enough.
    Senator McCaskill. Close enough. Is the Inspector General 
for the Export-Import Bank (EX-IM) of the United States. Prior 
to that, Mr. Gratacos served as Acting Inspector General and 
Deputy Inspector General and Counsel. Previously, Mr. Gratacos 
worked as a commercial counsel for Motorola with worldwide 
responsibilities for Federal transactions and also covered the 
Latin American region for commercial transactions.
    Hubert Sparks is the Inspector General for the Appalachian 
Regional Commission (ARC). Mr. Sparks has 46 years of service 
in the Federal Government. He was the first Inspector General 
for the Appalachian Regional Commission and the Denali 
Commission and has also served at the Offices of Inspector 
General for the U.S. Department of Agriculture (USDA), the 
Veterans Administration (VA) and the Department of Homeland 
Security (DHS). Mr. Sparks previously served as Chair of the 
Small Inspectors General Group at the Council of Inspectors 
General for Integrity and Efficiency.
    Michael Carroll is the Acting Inspector General for the 
U.S. Agency for International Development (USAID), and has 
served in that capacity since 2011. Prior to that, Mr. Carroll 
was Deputy Inspector General. Mr. Carroll has over 28 years of 
public service, and prior to his time at USAID, Mr. Carroll 
served as the Director of Administration for the Bureau of 
Industry and Security in the Department of Commerce.
    Beryl Davis is the Director of Financial Management and 
Assurance team at the Government Accountability Office, where 
her responsibilities include audits related to improper 
payments, grants management, agencies' internal controls and 
Federal Inspector General issues. Ms. Davis also serves as the 
GAO's representative in addressing standard-setting processes 
and activities of the International Organization of Supreme 
Audit Institutions (INTOSAI).
    That is an awesome name, isn't it? Supreme Audit 
Institutions. Wow.
    Before joining the Federal Government, Ms. Davis served as 
Vice President, Standards and Guidance for the Institute of 
Internal Auditors. She also served as Director of Audit 
Services and Management Support for the city of Orlando.
    It is the custom of this Subcommittee to swear all 
witnesses. If you would not mind, I would ask you to stand.
    Do you swear the testimony you are about to give before 
this Subcommittee will be the truth, the whole truth and 
nothing but the truth; so help you, God?
    Ms. Gustafson. I do.
    Mr. Gratacos. I do.
    Mr. Sparks. I do.
    Mr. Carroll. I do.
    Ms. Davis. I do.
    Senator McCaskill. Thank you very much.
    We will begin with Ms. Gustafson.

TESTIMONY OF THE HON. PEGGY E. GUSTAFSON,\1\ INSPECTOR GENERAL, 
               U.S. SMALL BUSINESS ADMINISTRATION

    Ms. Gustafson. Good morning, Chairman McCaskill, Ranking 
Member Johnson. On behalf of the Chair of the Council of 
Inspectors General on Integrity and Efficiency, I am honored to 
represent the Federal Inspector General community this morning 
in my capacity as Chair of CIGIE's Legislation Committee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Gustafson appears in the Appendix 
on page 27.
---------------------------------------------------------------------------
    Let me begin by again thanking this Subcommittee for your 
continuing support of our mission and your interest in our 
work.
    As you know, CIGIE serves a leadership role and is the core 
of the IG community. Together, the work of the IG community 
results in significant improvements to the economy and 
efficiency of programs governmentwide, with potential savings 
totaling approximately $46.3 billion in one fiscal year (FY). 
With the IG community's aggregate fiscal year 2012 budget of 
approximately $2.7 billion, these potential savings represented 
about a $17 return on every dollar invested in Offices of 
Inspector General.
    The IG Reform Act established CIGIE in 2008 to serve as its 
unified council of statutory Federal IGs to carry out 2 
specific missions--to address the economy, integrity and 
effectiveness issues that transcend individual government 
agencies and to increase the professionalism and effectiveness 
of personnel by developing policies, standards and approaches 
to aid in the establishment of a well-trained and highly 
skilled workforce in Offices of Inspector General.
    Over the past several years, the IG community has 
identified and addressed a number of issues that transcend 
individual agencies. Among CIGIE's reports, we have addressed 
topics such as cybersecurity, suspension and debarment, the use 
of new media, IG hotline operations, whistleblower protections 
and Inspector General oversight of the American Recovery and 
Reinvestment Act of 2009. These reports and others are publicly 
available on CIGIE's website.
    Our training and professional development mission is 
addressed through our training institute. The institute is 
still in the developmental phase, but in fiscal year 2012 the 
institute delivered specialized training courses to 1,677 
students, which was a 17 percent increase in students from the 
previous year.
    CIGIE does recognize that not every agency experiences 
independent oversight by an Inspector General and Offices of 
Inspector General vary in their available resources and law 
enforcement powers necessary to conduct effective oversight.
    In the past, CIGIE has played a role in facilitating 
requests for assistance to ensure effective agency oversight by 
an Office of Inspector General.
    Where IGs lack law enforcement powers, CIGIE has served as 
a quick and efficient means to communicate requests for such 
support from other members of the community.
    CIGIE has also been called upon for ad hoc requests such as 
assistance by its members to ensure effective oversight of the 
agencies under the particular OIG's jurisdiction.
    CIGIE will continue to provide this facilitation role and 
support requests to promote the efficiency and effective 
oversight.
    I want to just briefly mention that we are also grateful 
for the introduction of Senate Bill S. 1953, the Oversight 
Workforce Improvement Act, by Chairman Tester and Senator 
McCaskill and the support of that bill by its co-sponsor. This 
bill does recognize certain challenges faced by the IG 
community and addresses most concerns offered by CIGIE in its 
March 19, 2013 letter to the Office of Management and Budget 
(OMB), which outlines our current legislative initiatives.
    In addition to the legislative changes championed by S. 
1953, CIGIE continues to feel strongly that IGs should be 
exempted from the Computer Matching and Privacy Protection Act 
relative to using electronic means to identify those who 
improperly receive Federal assistance. And, as always, I am 
here to answer any questions about that, but I definitely 
wanted to mention that while I was here.
    I am grateful that IGs across the government have a voice 
through CIGIE and have access to training and other resources 
that did not exist prior to the IG Reform Act. We also have an 
unprecedented degree of transparency in our annual budget 
request, which helps assure independence.
    This does conclude my verbal testimony.
    Again, I want to thank you for inviting me here this 
morning, and I will be pleased to answer any questions you may 
have.
    Senator McCaskill. Thank you. Mr. Gratacos.

    TESTIMONY OF THE HON. OSVALDO L. GRATACOS,\1\ INSPECTOR 
        GENERAL, EXPORT-IMPORT BANK OF THE UNITED STATES

    Mr. Gratacos. Good morning, Madam Chairman, Ranking Member 
Johnson and other Members of this Subcommittee.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gratacos appears in the Appendix 
on page 35.
---------------------------------------------------------------------------
    Thank you for the invitation and opportunity to testify 
before you today about the oversight of small Federal agencies, 
specifically about my experience as the Inspector General of 
the Export-Import Bank.
    On Tuesday, I had an opportunity to read the draft bill 
circulated to us on Monday afternoon. The proposed draft bill 
could disrupt the operation of some of the established small 
IGs that have already found solutions to some of the challenges 
I discuss in my written testimony.
    There are a number of ways to strengthen small IGs, and 
that is the discussion my testimony is intended to accomplish.
    During my short testimony today, I would like to summarize 
Ex-Im Bank's mission, present a short history of Ex-Im Bank's 
OIG since we are one of the newest OIGs--Presidentially 
appointed OIGs--and discuss some of the challenges my office 
has faced since its inception. Before I continue, I would like 
to thank the Almighty for the opportunity, my family and the 
members of the OIG staff for their hard work.
    Ex-Im Bank--for some of you who do not know, Ex-Im Bank is 
the official export credit agency (ECA) of the United States. 
It supports the financing of U.S. goods and services in 
international markets, turning export opportunities into actual 
sales that help U.S. companies of all sizes create and maintain 
jobs in the United States. Ex-Im Bank has programs to address 
short, medium and long-term needs of exporters, assuming the 
credit and country risks the private sector is unable or 
unwilling to accept.
    In fiscal years, 2012 and 2013, Ex-Im Bank approved over 
$60 billion in export transactions combined. Ex-Im Bank's 
portfolio has increased by 94 percent since 2008, which is when 
the OIG was created. So the exposure increased from $58 billion 
to $113 billion as of the end of last year. In the current 
charter, Ex-Im Bank has authority to approve up to $140 billion 
in export transactions.
    Ex-Im Bank OIG was created in 2002, but the Inspector 
General did not officially take office until August 2007. The 
OIG has achieved noticeable success in performing its statutory 
duties. Specifically, since fiscal year 2009, we have issued 
over 40 audits, inspections and special reports containing 170 
findings, recommendations and suggestions for improving Ex-Im 
Bank programs and operations. Our law enforcement has resulted 
in a number of actions, including over 70 indictments and 
information, 45 convictions, 40 guilty pleas entered in court, 
over 400 management referrals for enhanced diligence actions 
and approximately $300 million in court-imposed restitution, 
forfeitures or repayments to the bank. All of this has been 
accomplished with a very modest budget, starting at 
approximately $1 million and gradually increasing, or rising, 
to about $5 million for this current fiscal year.
    But, as a small IG, my experience offers some highlights of 
some of the challenges that we face when we are establishing a 
new office or we are running a small office. Because of limited 
resources, I often rely on the agency to provide essential 
support functions, like information technology (IT), personnel 
management and financial management.
    As a small IG, I can name some of the challenges that we 
face--access to information, adequate office space, which is 
one of the challenges we had at Ex-Im Bank, and human resources 
support, for example.
    Despite these challenges, in my opinion, we have provided 
effective oversight of Ex-Im Bank, as our numbers show.
    Madam Chairman, Ranking Member Johnson and Members of this 
Committee, thank you once again for the opportunity to testify 
before you today. I will be pleased to respond to any questions 
you may have. Thank you.
    Senator McCaskill. Thank you. Mr. Sparks.

 TESTIMONY OF HUBERT SPARKS,\1\ INSPECTOR GENERAL, APPALACHIAN 
                      REGIONAL COMMISSION

    Mr. Sparks. Good morning, Chair McCaskill and Ranking 
Member Johnson.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sparks appears in the Appendix on 
page 40.
---------------------------------------------------------------------------
    I welcome the opportunity to discuss OIG oversight of small 
agencies. My comments are based on 44 of my 47 years being in 
the OIG community, including 29 years at major IGs and 15 years 
at IGs in small agencies.
    I guess I am representing the very smallest OIGs.
    I strongly believe that independent oversight of Federal 
spending and program operations is sound policy. Although OIGs 
generate very impressive statistics, including large potential 
benefits, one, if not the primary, benefit of an OIG presence 
is the preventive and deterrent value of such offices 
regardless of the size of the IG office.
    My written statement emphasized the optional structures 
providing an OIG presence in entities that currently do not 
have independent OIG oversight. These options included:
    Small agencies contracting with OIGs for services. I am not 
a fan of that because of some of the challenges that Chairman 
McCaskill mentioned about getting full authorities for these 
contracts.
    A permanent IG presence. I do not believe a permanent IG 
presence is necessary at some of the very small entities that 
were in the discussion draft for having an IG presence. There 
may be a few of those that deserve a full-time independent IG.
    The primary options that I would recommend are legislative 
oversight provided by another IG office, and this could be 
either from a large IG office or one of the smaller IG offices, 
depending on the size of the entity for which oversight is 
requested.
    Another option which I supported for my agency is 
establishing OIG responsibilities for oversight of several of 
the smaller entities for which independent oversight is 
proposed.
    I would be glad to discuss these options.
    I appreciate the efforts of the Committee on this important 
issue.
    At the time of my written statement, I did not realize the 
proposal would include the elimination of nine Designated 
Federal Entities' (DFE) smaller IGs. Thus, I would like to take 
a minute to comment on this aspect of the proposal.
    Although I will be completing my final retirement shortly 
and thus have no direct horse in this race, so to speak, I have 
concerns with the elimination of the noted DFE OIGs.
    Recognizing Chairman McCaskill's comments about the 
challenges that smaller IGs face, I also believe that 
elimination would substantially reduce the level of oversight 
provided to their respective agencies, and this might be 
somewhat contrary to the overall objective of providing 
oversight to all Federal funds.
    Expertise gained over many years and the experience of 
running a smaller IG and dealing with the challenges and 
dealing independently with agency heads and senior officials on 
a regular basis would be reduced.
    I do not know the criteria for reaching elimination 
conclusions, but I do not believe such issues as just the size 
of our current staff should be primary factor. I think it 
should be how much we are benefiting and what value we provide 
to the agencies we now oversight.
    Also, the cost of service provided by another IG would 
probably at least equal current OIG costs if the level of 
oversight is to be maintained. However, the very important 
element of onsite presence would be significantly reduced.
    Other practical matters involve the staffing of oversight 
of smaller agencies by the acquiring OIG and the larger IG's 
interest or enthusiasm with respect to providing such services, 
considering the high-risk programs that large IGs have to 
oversight.
    I also believe established smaller IGs can provide 
necessary oversight to smaller entities without such oversight 
and could concentrate more directly on this responsibility than 
large IGs who, admittedly, have far higher priorities.
    I was somewhat surprised the employee rights section of the 
discussion draft provides that newly assigned IGs will 
determine whether staff of the transferred IG will be employed. 
This basically results in smaller IGs, most of whom are long-
term career employees who earned their positions through 
demonstrated performance, not only having their organizations 
abolished but also being subject to termination if the 
acquiring IG does not pick them up.
    I would suggest that the legislation, if it goes forward, 
clearly transfer the staff of the smaller IGs to the acquiring 
IG and those staff would be part of the normal evaluation 
process and assessed on how their performance is rather than 
kind of having to wait in limbo to see for a year if they are 
going to be picked up by the major IG.
    I would hope also that the legislation should consider 
eliminating for now the elimination of the small DFE OIGs. I 
think it is a good subject for discussion, but I think there 
should be more discussion with the smaller IGs and with GAO, 
who supported establishment in the first place.
    And, if the proposal goes forward, I would recommend that 
it not include at the present time elimination of the 
Designated Federal Entities until we could have more discussion 
of a very important subject.
    One of the things that I did agree with--and I appreciate 
that it is in the proposed draft--is I and the former IG at the 
Appalachian Regional Commission have regularly commented that 
consolidation of seven small economic development commissions, 
most of whom are supposed to have a legislated IG, be 
consolidated into one IG office.
    These commissions are very unique joint State/Federal 
partnerships paid for partially by State funds, partially by 
Federal funds. Currently, there is only one IG presence in all 
seven, and that is me at the Appalachian Regional Commission.
    And I do believe that kind of a consolidation would be very 
valuable. I do not mean this to be supportive of other 
consolidations for which my knowledge is limited.
    Thank you very much. I would be glad to answer any 
questions.
    Senator McCaskill. Thank you, Mr. Sparks. Mr. Carroll.

 TESTIMONY OF MICHAEL G. CARROLL,\1\ ACTING INSPECTOR GENERAL, 
           U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

    Mr. Carroll. Chairman McCaskill, Ranking Member Johnson, I 
appreciate the opportunity to appear before the Committee today 
to discuss and share my experiences and the experiences of the 
USAID OIG in providing oversight for five Federal agencies, 
ranging in size from $24 billion to $22 million.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Carroll appears in the Appendix 
on page 45.
---------------------------------------------------------------------------
    And I look forward to the opportunity to work with you and 
your staff. I have a vested interest in this legislation, and I 
really look forward to working with you to move this 
legislation forward.
    I think that, at least in my opinion, the consolidated 
model that you are considering here is clearly an effective 
model for providing oversight of small agencies. You get 
economies of scale. You get functional depth. And you get a 
critical mass of oversight that really allows for effective 
oversight of smaller agencies.
    Now the consolidated model works for us particularly 
because we have sort of organizational alignment, if you will, 
with the agencies in our portfolio. All of the five agencies 
that we are responsible for are foreign affairs/foreign 
assistance agencies that deliver their oversight in developing 
countries, and the organizational depth that we have to oversee 
that is substantial over the years.
    We are a Foreign Service organization, as you know, and we 
have the technical expertise and the structural infrastructure 
in place to support oversight, whether it is a billion dollar 
AID program in Afghanistan, whether it is a $500 million 
program for the Millennium Challenge Corporation (MCC) in 
Africa or whether it is a $10,000 the Inter-American Foundation 
(IAF) grant in Latin America. So, regardless of the agency, the 
modality or the scale, we have the technical expertise to 
oversee those programs.
    The other thing that consolidation brings--and I will refer 
to IG Gratacos's written testimony--is economies of scale with 
administrative services. I think we would all agree that 
effective oversight is independent oversight. And it is 
difficult, I realize, for the small IGs getting their 
administrative services from their agencies to be as 
independent as they would like to be.
    At the AID IG, we maintain and operate our own 
administrative services separate from the agency. There is a 
cost incurred there, but I think it is money well spent. And it 
allows us to very effectively and equitably distribute our 
administrative overhead across the five agencies that we are 
responsible for.
    I think the other benefit that consolidation gives you when 
you have alignment with the businesses of your organizations--
and we have talked about this before in a special IG context--
is strategic, or cross-cutting, oversight of whatever the line 
of business is.
    For us, it is foreign assistance. So we have oversight 
currently of the five primary foreign assistance agencies in 
the U.S. Government, and that gives us the ability and the sort 
of strategic look at that sector and provide oversight if, in 
fact, there was a need to do that.
    I would like to, if I could, just identify one challenge 
that we have had in overseeing five Federal agencies that I do 
not think right now, the way I have seen the draft legislation, 
is as good as it could be. Certainly, this is great 
legislation, but there is one particular issue I would like to 
bring up.
    Our construct is we were created in 1980 based on the IG 
Act. So it is very clear what our authorities are as it relates 
to the OIG as it relates to AID.
    The other four agencies--the Overseas Private Investment 
Corporation (OPIC), the Inter-American Foundation, U.S. African 
Development Foundation and MCC--our authorities there come from 
a wide array of legislation over time that is not, in my 
opinion, as effective as the IG Act.
    So, for example, 6 months into the fiscal year of 2014, we 
are still negotiating with OPIC on an oversight package.
    And, while this is not the case anymore under Daniel 
Yohannes, but prior to his leadership at MCC, we had 
historically a very difficult relationship with them because, 
as we were trying to apply the authorities that we had and the 
responsibilities that we had to oversee their programs, they 
did not see the nexus or the authority. In fact, I had a 
conversation at one point with the Deputy Chief Executive 
Officer (CEO) of MCC, when we were trying to implement a 
particular requirement that we had, and he said that is your 
problem, not mine.
    So I do not think that the Committee wants to see any of 
the IGs in a position where we are negotiating our authorities.
    So I think, ideally--and this may be difficult, but 
ideally, what I would love to see is when you implement this 
implementation, that the authorities for all of these entities, 
even the ones currently under my authority, are all captured in 
the IG Act.
    That would have the added benefit of creating a nexus to 
this Committee that might not exist right now for those other 
four agencies. It certainly does with AID, where we have 
oversight over the IG function. But by virtue of the fact that 
those four agencies are not captured in the IG Act, it creates 
uncertainty, if you will, not that you could not exert your 
authority if you wanted to.
    So that is the one real critical piece of feedback I would 
like to give the Committee.
    And then, as several people at the table have stated, it is 
a challenge to stay focused on the small organizations when you 
have large organizations that you are overseeing. You have 
Senator McCaskill, with Senator Coburn, wanting to know what is 
going on in Afghanistan or Iraq, and you have still got to 
worry about that $10,000 grant that IAF is issuing in Latin 
America.
    So it is not impossible, and it is certainly doable, but it 
is just the IGs really have to stay focused on their entire 
portfolio. And I would submit that at five agencies I am about 
the edge of the span of control that you would want for an IG.
    And I appreciate the fact that in the legislation that the 
Ex-Im Bank IG could pick up OPIC, and I think that makes sense 
from a line of business point of view, that it much more aligns 
with his operation than it does with mine.
    So I appreciate the opportunity to appear here, and I am 
happy to answer any questions that the Committee might have.
    Senator McCaskill. Thank you. Ms. Davis.

TESTIMONY OF BERYL H. DAVIS,\1\ DIRECTOR, FINANCIAL MANAGEMENT 
      AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Davis. Chair McCaskill, Ranking Member Johnson, thank 
you for the opportunity to be here today to discuss oversight 
of the small Federal agencies.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Davis appears in the Appendix on 
page 50.
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    My testimony will focus on the creation of independent 
inspector general offices, IG oversight of small agencies, and 
IG independence and budgetary resources.
    The Inspector General Act of 1978 established IG offices 
with IGs appointed by the President and confirmed by the Senate 
in 12 major departments and agencies of the government. Their 
responsibilities include conducting and supervising audits and 
investigations, recommending policies to promote economy, 
efficiency and effectiveness, and preventing and detecting 
fraud and abuse in programs and operations.
    Since then, additional IGs have been added through a series 
of amendments to the Act. The 1988 amendments established IGs 
in Designated Federal Entities, also known as DFEs, with 
responsibilities similar to those of IGs appointed by the 
President.
    However, there is a clear distinction. They are appointed 
and removed by their agency heads rather than by the President 
and are not confirmed by the Senate.
    GAO has long supported the creation of independent IG 
offices in appropriate Federal departments, agencies and 
entities. In 2001, when asked to review the need for an IG at 
the Export-Import Bank, we presented just one option, 
establishing a new IG office with an IG appointed by either the 
President or by the Export-Import Bank chairman.
    We have also recommended that certain small agencies could 
benefit by obtaining IG oversight from another agency's IG 
office where the missions of the two agencies are somewhat 
similar. In 2008, we reported on the responsiveness of the 
Chemical Safety Hazard Investigation Board (CSB) to past IG 
recommendations. The Environmental Protection Agency (EPA) IG 
had been providing oversight to the CSB since 2004 through a 
temporary mandate.
    Our review disclosed that the CSB was not investigating all 
accidental chemical releases that involved a fatality, serious 
injury or substantial property damage. As a result, we proposed 
alternative oversight mechanisms to give the EPA IG permanent 
oversight authority.
    In a recent example, our review of the programs and 
management practices of the National Mediation Board concluded 
in a 2013 report that this small agency with a vital role in 
facilitating labor relations in the Nation's railroads and 
airlines lacked certain internal controls that could help 
achieve results and minimize operational problems. We 
recommended that an existing Federal agency's IG office provide 
independent audit and investigative oversight.
    Independence is the cornerstone of professional auditing 
and one of the most important elements of an effective IG 
function. The IG Act provides protections to IG independence 
that are necessary in large part because of the unusual 
reporting relationships of the IGs who are subject to the 
general supervision of their agency heads while, at the same 
time, reporting externally to the Congress.
    The IG Act provides the IGs with independence by 
authorizing them to select and employee their own staffs and 
make such investigations and reports as they deem necessary.
    The IG Reform Act of 2008 further enhanced IG independence 
and accountability by specifying the levels of basic pay for 
IGs and requiring IGs to obtain legal advice independent of 
their agencies.
    It also provides a process for handling allegations of 
wrongdoing by IGs so that such reviews are not done by the 
management officials or subject to IG oversight. The Act 
requires both the President and the DFE heads to give Congress 
notice at least 30 days before removing an IG.
    In addition, the Reform Act helps ensure IG independence 
through adequate funding by requiring the IG budget requests be 
separately identified in the President's budget submission to 
Congress.
    The Dodd-Frank Act of 2010 amended the IG Act with 
provisions to enhance the independence of IGs in DFEs, who may 
now report to the entire board or commission rather than an 
individual chairman. A two-thirds majority of the board or 
commission is required to remove the IG.
    With the growing complexity of the Federal Government and 
the fiscal constraints under which it operates, it is important 
that an independent, objective and reliable IG structure be in 
place where appropriate to ensure adequate audit and 
investigative coverage. IG offices play a key role in Federal 
agency oversight by enhancing government accountability and 
protecting the Nation's resources.
    There are different alternatives for IG oversight. The 
determination of where and how to provide IG oversight in 
specific agencies is a policy decision best addressed by the 
Congress.
    This concludes my prepared statement, Chairman McCaskill 
and Ranking Member Johnson. I would be pleased to answer any 
questions you may have.
    Senator McCaskill. Thank you all.
    We have an awful lot of expertise at this table, and I am 
going to try to let you all guide this discussion as much as 
possible so we can pick your brain on the right way to get this 
fixed.
    Is it inaccurate for me to say that right now for 41 
different agencies or commissions the only time they get 
independent oversight is if they ask for it? Does anybody 
disagree with that statement?
    [Witnesses shaking heads negatively.]
    So that is a problem because I have not noticed in this 
business that your phone rings off the hook for people calling 
and saying, please come look at us; please come see us.
    And also, am I correct in saying if, in fact, for some 
reason they do call they get to pick and choose what you look 
at? Is that correct?
    Mr. Carroll. That is correct.
    Senator McCaskill. So not only is it up to them to decide 
if they want someone to take a look; it is also up to them as 
to what you get to look at.
    And I would like you, Mr. Carroll, to speak a little bit 
about your experience with negotiating with OPIC. Are you 
negotiating over cost because there is not a budget line, or 
are you negotiating over scope?
    Mr. Carroll. Scope. If you look back at the history of our 
relationship with OPIC--and I am not going to question the 
wisdom of Congress, but over time, in the Foreign Assistance 
Act, our authorities have eroded. That was a conscious decision 
that the Congress made to sort of weaken our authorities, if 
you will.
    Senator McCaskill. I wonder why. Do you know?
    Mr. Carroll. I know the history. For example, at some 
points, OPIC was given responsibility for conducting their own 
financial statement audit, and I would not agree with that. I 
would never agree with that, and I do not think you would 
either.
    And one of the fixes that I have seen in the draft 
legislation is our authority is ``may'' and the new authority 
is ``shall.'' And I think that is very important. That might 
seem like a nuance, but it is clear in the material.
    And literally, at this point, we do not have the authority 
to do audits; that is clear. We have the authority to conduct 
investigations and reviews.
    So now we are in negotiation with them, 6 months into the 
fiscal year, trying to do a risk assessment, for example, and 
they will not sign the memorandum of understanding (MOU) with 
the risk assessment in it because they are stating that there 
will be an OPIC IG in 2015 based on the Power Africa Act. And 
they are waiting on that, and they think that this would be a 
waste of money and be duplicative.
    It is an untenable situation.
    Senator McCaskill. They are waiting for legislation from 
Congress?
    Mr. Carroll. Yes. Right. There is legislation in the House, 
if I am not mistaken. It is called the Power Africa Act.
    Senator McCaskill. You need to please explain to them that 
they may be ``Waiting for Godot.''
    Mr. Carroll. Right. So there needs to be communication here 
within the Congress.
    So it is untenable.
    Here we are, and you know, they have been successful. It 
has been a Fabian kind of defense, and they are not negotiating 
in good faith, but it has been a very difficult, contentious 
negotiation.
    Senator McCaskill. Let me also talk a little bit about IG 
independence. It has always seemed weird to me, as I began 
learning about IGs when I came to Washington, that we have some 
IGs that are Presidentially appointed and we have other IGs 
that the agency hires.
    Well, that is weird. I do not know how independent you can 
be if you are subject to the complete control of the head of 
the agency and if you owe your job to the head of the agency 
and you owe how you--I mean, I get that you cannot get removed 
as easily as maybe other employees.
    But, wouldn't there be value--I would love each of you to 
speak briefly to this, and then I will turn it over to Senator 
Johnson for some questions.
    Wouldn't it be better if--I know we have difficulty getting 
IGs confirmed. No matter what party is in charge and what party 
has majority, confirmations are always a difficult process, and 
we have too many people we have to confirm.
    But this is an area for independent oversight. It just 
never has made sense to me that you would have an IG that is 
actually hired by the person that they are supposed to be 
overseeing, and I would like each of you to speak to that if 
you are comfortable in doing so.
    Mr. Sparks. As one of those Designated Federal Entity IGs, 
I think in my statement I did not push for Presidential for 
each of us and did not support such. I think it has merits in 
some sense.
    My experience is it has not really affected how talking to 
my fellow smaller IGs--we have operated.
    The IG Act has such powerful authorities. Very few 
bureaucrats have authorities to look at anything you want and 
have access to all your records and have subpoena authorities 
and to issue public reports. And, if they are interfered with 
by the agency head, we have the right to come to you folks and 
say we have been interfered with. So, on a practical basis, I 
think, the current process, has worked well.
    Prestige-wise, I think it probably adds a little power, and 
input--when you are dealing with the agency head.
    The negative part--and I brought this up at our smaller IG 
group meeting last week, and most did not see a real need. They 
would certainly accept it, and they certainly see it has some 
benefits, but they were somewhat concerned that when you went 
to a Presidential IG the chances of an experienced OIG employee 
that has come through the ranks to get to be the IG at a small 
agency might be reduced because there would be a different 
vacancy--number of candidates and what you mentioned, the time 
of getting confirmed.
    But I think basically we have dealt with that. I think it 
would probably be--if you talked to a lot of the smaller IGs, 
they might say yes, it would probably add a little bit to us.
    I have been there for 15 years, at ARC, and the Denali 
Commission for its first 3 years. I did not see that they 
challenged us too much on our authority.
    I always make the statement that we all audit our 
supervisors. If you are the IG at the Defense Department (DOD), 
appointed by the President, on a day-to-day basis, you are 
auditing your supervisors because any program you audit goes 
through the Secretary of Defense. So you are auditing your 
supervisors just like I audit my supervisors.
    But we have lots of authority. I think only administrative 
law judges with lifetime appointments have more authorities 
than IGs, and we have to use those authorities judiciously.
    So I have not pushed for that. Let me just stop there.
    Senator McCaskill. I understand the arguments you made. I 
think they are cogent and make sense on both sides of the 
equation.
    I have not noticed IGs--in fact, I have been involved in 
trying to help find IGs for vacant agencies, and the pool has 
generally respected people in the Federal IG community.
    I have not noticed this President or, frankly, President 
Bush--I think the fear might be for people who are not close to 
this system, that all of a sudden this would become some kind 
of political appointment as opposed to a professional 
appointment.
    But I think that at least the two Presidents that I have 
worked with since I came to Washington; both of those 
Presidents, I think, have pretty much just tapped the pool of 
good IGs that are out in the community that either get moved 
from a smaller agency to a bigger agency or get moved from an 
assistant IG to the IG as opposed to outsiders coming in.
    Mr. Sparks. Chairman, I totally agree with that, and that 
is the way it goes.
    And I mentioned to your counsel, Sarah, a couple of weeks 
ago, as an aside, that if you made the Appalachian Regional 
Commission IG a Presidential appointment and I could get it, I 
would extend my life for 6 months and stay there.
    Senator McCaskill. There you go.
    Ms. Gustafson. If I can just comment just quickly, first 
off, I was not in that pool, and I am an IG, and I think I 
would do OK. So it is not always a thing from within the IG 
pool.
    But I do want to say, having been on the outside----
    Senator McCaskill. Let me rush to say that your 
appointment, though, was based on merit for your many years of 
service in the audit community.
    Ms. Gustafson. Well, there is no question.
    Senator McCaskill. I do not want anybody to think that you 
were not highly qualified for the position.
    Ms. Gustafson. No, 8 years in an auditor's office.
    And, actually, there have been a couple of IGs that I can 
think of off the top of my head. DHS has a new IG who, I 
believe, is from outside the community as is Michael Horowitz 
who is from the Department of Justice (DOJ), who is the DOJ IG, 
who came from outside the community.
    So I certainly think that there are certainly strong 
professionals being nominated who are being named IGs as well 
that have not had that much experience with the IG community 
before then.
    But having been on the outside and not on the inside, I 
understand your thoughts on Presidential versus DFE.
    And now that I am an IG I have to say it really is--I have 
come to really appreciate the strength of the IG Act is. I 
mean, IGs are given a great deal of independence through that 
Act, whether you are a DFE or whether you are a Presidential 
appointee.
    I am asked this question often. I have been asked this 
question before, about whether there is a level of 
independence. And I think Mr. Sparks makes a lot of good 
points, but in the end, as I think you appreciate, it depends 
on who the IG is.
    I mean, I think you can be an IG who is a Presidential 
appointee and allow yourself to get pushed around. Or, you 
could be a DFE and completely stand up. So, in the end, it 
really is about the quality of the person; it is really the 
most crucial part.
    Even understanding, I think, Mr. Sparks makes some really 
good points, but, yes, I think it is a very strong community 
with--it is a very powerful tool. The IG Act is a very powerful 
tool that you can use to exert a lot of independence, and I 
think that we use that.
    Senator McCaskill. Great. OK, Senator Johnson.
    Senator Johnson. Thank you, Madam Chairman.
    Interesting hearing. As I go through my questions, first of 
all, whoever feels most qualified to answer just chime in 
because I am not quite sure who I should really be asking these 
things of.
    I am coming at this from the perspective of a private 
sector guy who has gone through a lot of financial statement 
audits as well as the International Organization for 
Standardization (ISO) quality systems surveillance audits.
    A lot of the issues we are discussing here are the same 
issues involved in the private sector in terms of an 
independent auditor that if he just comes into a business or an 
agency cold has a lot to learn and can also miss a lot because 
they are not knowledgeable versus somebody who has been with an 
agency or a company, an auditor long-term that really knows the 
business and can spot things more quickly but has the potential 
then, whether it is called auditor capture or inspector general 
capture, to really lose some independence. I think that is 
really the difficult issue we are talking about here.
    Let me start out by asking, within the agencies, what is 
automatic in terms of inspections or audits every year?
    Mr. Carroll. Well, there are a number of audits that are 
required by law. The ones that come to mind are the financial 
statement audit, the Federal Information Security Management 
Act (FISMA) audit, and there are some other audits that we have 
to do--the Improper Payment Elimination and Recovery Acts 
(IPERA) for improper payments, those sorts of things.
    Senator Johnson. Which of those are contracted with an 
outside auditing firm----
    Mr. Carroll. OK.
    Senator Johnson [continuing]. Versus done by the Inspector 
General's office?
    Mr. Carroll. Right. So I think--well, I will only answer 
for myself, and I think it has to do with scale, and there is a 
philosophy.
    For example, we do the financial statement audit of USAID 
in-house.
    We contract it out for the other four organizations because 
they are smaller organizations and they sort of--well, the two 
corporations and the two foundations have more of a corporate 
structure that you are familiar with. So we use outside audit 
firms that we supervise.
    But with AID, since we are the indigenous IG, we do that 
work ourselves. Where we need technical expertise, for FISMA, 
for example, we will contract that out, to do penetration 
testing and that thing--and that sort of thing. But, again, we 
supervise that ourselves.
    But, generally, we prefer to do all of the audit work 
ourselves in-house.
    Senator Johnson. So what is the tradeoff, and how do you 
guard against that tradeoff in terms of being familiar with the 
agency, familiar with what part you are auditing, versus really 
being independent?
    I know you have auditing standards and that type of thing. 
But, in terms of just the basic reality of the situation, that 
is a really difficult problem, isn't it, and how do you deal 
with that?
    Mr. Carroll. Well, maybe I am misunderstanding your 
question, Senator, but I think by virtue of the fact that the 
statutory IG or the federally Designated IG is the one doing 
the work there is no question of independence there. We 
understand the systems. We understand the vulnerabilities. We 
understand the business model. And I think that is a benefit 
rather than a disadvantage.
    And I would say, in the corporate world, the for-profit 
audit industry is exactly that--for profit.
    And I would say we are more independent than for-profit 
audit organizations on the outside that are looking for the 
work the next year.
    Now I am not saying that they would do anything different 
than we would do, but we are completely independent, and I 
think that is a strength rather than a weakness.
    Senator Johnson. Well, I will agree with Ms. Gustafson. It 
really does depend on the individuals.
    We certainly saw that within the OIG's office within DHS we 
had some real questions in terms of independence, and I think 
that was because of an individual, not necessarily the Act.
    But, again, you are dealing with people, both in the 
agencies and the IG's office. So I think it is a serious 
concern in terms of how you maintain that type of independence.
    In terms of the consolidation, I see a real problem if you 
just take an OIG from a particular agency and then provide 
other smaller agencies that that IG is going to have to provide 
those inspections for. What type of attention are they going to 
get? Just speak to that issue.
    I think from my standpoint it almost seems better to have 
completely independent OIGs for five different agencies rather 
than have one associated with one agency and then offload four 
additional agencies to that one because, again, I just think 
they are going to have far less attention. So can you speak to 
that problem?
    Mr. Gratacos. Well, in our situation, the draft bill talks 
about OPIC. And OPIC fits very well with what we do already, 
and that is what IG Carroll was mentioning before. It is the 
same type of transactions we look into. One is the investment 
side, which is risk insurance, but they all go into that same 
process of underwriting. So, for us, we would have the 
infrastructure to take over OPIC, and it would be an easy 
match.
    Now there was a discussion a few years ago on the House 
side to bring also--I think it was the U.S. Trade and 
Development Agency (USTDA) under us. That was a little 
different; so, grants. We do not do grants.
    So, even though it is trade, it is grants. So USAID might 
be better equipped to handle that.
    Those are the challenges that we have.
    And, to add to the OPIC thing, the discussion they had a 
year ago or 2 years ago on the House side, they were talking 
about only in the audit component and only for a period of 
time--for 2 years, 3 years. We did not think that was 
effective.
    I think we need full authorities in the IG Act because many 
times--and it happens to us at Ex-Im Bank--you are looking at a 
transaction in an audit and you find fraud. And so we are 
equipped right on the spot to investigate it.
    Senator Johnson. Let me go to that because it has been said 
that it is very important that the missions be similar. I want 
to just really probe that a little bit.
    I mean, a financial transaction is a financial transaction. 
No matter what type of agency, fraud is fraud. There are 
certain auditing standards. There is a process to go through.
    I mean, how important is it that the IGs are assigned to 
agencies with similar missions when you are talking about 
financial transactions that are common between different 
agencies no matter what their agency mission is?
    Mr. Gratacos. I think from our perspective we are looking 
at, for example, at a product's financial structure overseas, 
right. It is a little bit different than a financial 
transaction on the government perspective. So they are more 
commercial in nature.
    That is what OPIC does, too. That is what we do. That is 
what multilaterals do. World Bank, the Multilateral Investment 
Guarantee Agency (MIGA), the Inter-American Development Bank 
(IDB). And so that is a different component.
    Now, when we are talking about financial statement audits, 
there are very similar components. You can see skills that you 
can transfer across agencies.
    Performance audits, that is the Yellow Book. We can do that 
across agencies.
    But there are certain components and a certain level of 
sophistication on the transactions that are involved in some 
agencies that I think the expertise or the knowledge of at 
least the basics of the transaction can really save you a year 
or two of learning how it works.
    Senator Johnson. OK. My time has run out.
    Anybody want to chime in just on the questions I had.
    Mr. Sparks. Just back to your first question, Senator, I 
guess as a smaller IG I recommend individual IGs as you were 
talking about for each agency. I think the presence and the 
knowledge that you gain with that agency cannot be substituted 
by a part-time IG from another IG office, particularly a large 
IG office.
    Based on 30 years in the larger IGs, I recognized that we 
assigned and put highest priority on highest priority projects 
and risks that the agency had. And it is just human nature; we 
are not going to put our best staff on a $1 million or $2 
million entity.
    So I think a separate IG with a significant budget and a 
sensitivity to a program is well worthwhile.
    With respect to the consolidation, what I was talking about 
is very small agencies that have similar things. When I talked 
about six economic development commissions, we do exactly the 
same thing, and maybe one IG who knows grants is sufficient.
    I have a counsel from another OIG and as Chairmam McCaskill 
said, we have some challenges. Some of us have to get legal 
counsel investigative help. And we generally have agreements 
with an IG that has similar responsibilities as we have if we 
are going to conduct a fraud investigation or get some legal 
opinions.
    So I think I agree with you on that, if possible, a 
separate IG is best. I do not think it costs any more to have 
the separate IG even though it is a small staff, with the 
onsite presence and knowledge of that agency, as opposed to 
farming it out to another agency who may or may not have 
targeted staff to put that oversight and may not have the 
priority that they would have for their regular programs.
    Senator Johnson. OK. Thank you.
    Senator McCaskill. I know this is not in the draft, and I 
know this is going to stir things up a little bit, but 
honestly, if I could wave a magic wand, I look at the model of 
the office that I am most familiar with, which is the State 
auditor's office, we had the authority to go in anywhere, in a 
wide variety of places, with a wide variety of different 
missions, whether it was a highway commission or a county 
government or whether it was the prison system.
    And it was our experience that having someone who had done 
that audit before was helpful, but it was also helpful to have 
someone on that audit team who had never done that audit before 
because you had fresh eyes. You had someone who did not have a 
built-up relationship with the administration and that agency. 
You had someone who was taking a fresh look at it combined with 
the expertise of somebody on the team that knew the agency 
well.
    So, if we have 41 agencies that have nothing, why couldn't 
we do an Inspector General for small agencies that has a staff 
large enough to develop the expertise--because here is the 
problem we are going to have.
    I could easily have you in front of this Committee, Mr. 
Carroll, and talk about your risk assessment and say to you, 
what in the world are you doing, looking at $10,000 program, 
when we are hemorrhaging billions in Iraq or Afghanistan, 
because all of you are tasked professionally with going to the 
places where there is the highest risk.
    And my problem is that we are never going to get economies 
of scale in some of these very small agencies in terms of 
overhead unless we are going to go to CIGIE or some other 
organization to provide overhead, which I agree; I think the 
independence of the overhead--just the day-to-day H.R. 
administrative things--is something that can really stress a 
small IG office to the point that they are consumed with that 
instead of figuring out what rock they need to look under.
    So assuming that there would not be a widescale panic in 
the IG community that everyone was going to be disrupted and 
their plans for the next 10 or 15 years all of a sudden have 
disappeared in front of their eyes because they are pretty 
comfortable where they are and they are pretty sure they can 
stay at that agency until retirement.
    Other than that problem, what problem would you see with us 
trying to fashion the Inspector General of Small Agencies with 
the kind of competence staff and with the requirement that 
every agency would have to have a line item to support that 
agency in commiserate with the size of their agency and the 
risk they represent?
    Mr. Carroll. I will just speak to my own universe.
    I do not see any problem with that, theoretically, but 
practically speaking, in my part of the world, it would be very 
difficult to find a domestic IG that has the kind of expertise 
and, like I said before, infrastructure.
    We are a Foreign Service organization. We have people 
posted around the world. And we can bring those people and that 
expertise and those experiences with SAIs and local law 
enforcement. We can bring all of that to bear on any of those 
five agencies' programs being implemented in those countries.
    So I do not disagree that domestically that might work, but 
I think in my particular case, if you were looking to take IAF 
and the U.S. African Development Foundation (USADF) out from 
under my portfolio, or OPIC, I would not argue with that. I 
would be happy to do whatever you wanted.
    Senator McCaskill. I get the international distinction. I 
think there is some merit to that.
    Mr. Carroll. Right. But, domestically, I think it could 
make sense, absolutely.
    Senator McCaskill. I know you have to go back to the IG 
communities. So I have to be careful here because I am sure 
this would not be the most popular proposal that has ever been 
put out by Congress.
    Mr. Sparks. Well, actually, I agree. One of my 
recommendations--I was not necessarily talking about 
established IGs because I do think we want to look a lot harder 
at them.
    But one of my recommendations, particularly for some 
smaller entities that are being proposed, is one IG. I think 
that provides an IG staff that could have a couple of auditors, 
a couple of inspectors, a couple of evaluators, a lawyer and a 
couple of investigators. And they can gain the expertise on 
those very small programs fairly quickly.
    A lot of the programs I looked at are basically similar. 
Providing scholarships to high school students--for example by 
some of the smaller entities.
    Ronald Reagan, I think, proposed an Inspector General for 
the Executive Branch that would be like GAO and put us all in 
one IG.
    There have been conversations about whether CIGIE should 
establish a staff to do it. I do not think that is practical. 
We would have 72 IGs trying to agree on an audit report, and we 
would never get it out. We are already late on getting most of 
them out, that type of thing.
    So I do not think it has benefits to consolidate in that 
sense.
    One of the things that I know my fellow IGs probably would 
not like is if I discussed the practicality of not assigning 
them to a larger OIG but consolidating some of the small ones. 
And least one small IG agrees with this concept. Most of them 
probably would not.
    Consolidating several of the smaller IGs, rather than 
putting them into a major IG office which does have a lot of 
other priorities--I think that is a more practical thing maybe 
to be discussed further, and I believe this is done in a couple 
of instances in your proposal.
    But I think the concept of what you are saying can work, 
particularly if you do not have special circumstances, like AID 
or the programs on FAST.
    I have worked with many State auditor offices in 
Appalachia, and as you say, they have a variety of programs 
that they operate.
    Ms. Gustafson. Senator, I think basically, as Ms. Davis had 
noted in her opening statement, what you are talking about are 
policy questions over how this oversight is going to get done.
    And so I think that I am, again, very grateful that these 
conversations have been happening already. I think that this 
hearing is a good way to, again, have more of these 
conversations.
    I think the next most helpful thing will be to talk to the 
IGs who are directly affected. I think that they would, as Mr. 
Sparks said, have a lot of opinions because I think in the end 
it gets pretty granular.
    I think, this is a very bold idea. This is kind of a big 
swing.
    So I think that this is something that would be--would 
benefit from a lot more conversations with not only the small 
IGs affected but the big IGs. When you look at your draft bill, 
there are some responsibilities that would be given to some 
large IGs that I think it would be helpful to have those 
conversations as well.
    And then in the end, what it is, is a policy decision.
    Just pretty quickly, when you talk--and of course, I am 
well aware of the State auditor model.
    The only difference--and I think one of the things that you 
will hear about and one of the things you are grappling with is 
one of the differences is when you are not located within the 
agency.
    I do have to say that one of the big strengths about the IG 
Act in general and one of, I think, the strokes of genius that 
really happened in the IG Act was to say here is this 
incredibly independent entity, but you are in that agency.
    And there are definitely benefits to that. I can tell you 
that there are benefits to that--being able to be there in 
place and to be able to walk down the hall. And, to a certain 
extent, there is a different tenor to the conversations when 
you are not the State auditor kind of coming in.
    That does not mean that it is insurmountable. I just think 
it is something that is worth talking about, and that is why I 
think it is an important conversation to have, especially when 
you are talking about IGs that maybe are in those agencies 
already.
    I think it is going to be an important conversation and 
just something to think about.
    Senator McCaskill. It may be that you could work a model, 
that you could have someone assigned interior to every agency, 
but then you would have the problem of the administrative 
overhead taken care of. You would have continuity in case there 
was someone--part of problem is we lose an IG and especially if 
it is--sometimes it takes forever.
    I mean, we have had major IGs sit vacant for years in this 
country, which is very frustrating.
    And, for these small agencies, it would provide continuity 
if they were there under the auspices of a small agency IG but 
assigned to actually be within the agency for their work.
    Mr. Carroll. And, Senator, we do that with MCC. In MCC's 
enabling legislation, there is a hard cap, and that is another 
thing maybe we can talk about--the hard cap. There is a hard 
cap of $5 million set aside in MCC's budget for oversight, and 
so we draw off of that.
    And because of the scale of MCC, about a billion dollars a 
year, we have created a separate infrastructure within the 
USAID OIG to address MCC. And we bill that direct labor back, 
and we bill the----
    Senator McCaskill. We have a hard cap of $5 million on a 
budget of a billion?
    Mr. Carroll. Yes. And I saw in the draft legislation some 
potential caps and some potential--for example, I may have 
misunderstood, but the IG would do one audit by a certain 
amount of time. I would strongly recommend no cap on audit and 
no cap on budget.
    If we can develop with GAO's help--and they have looked at 
this in the past--a percentage based on the complexity and that 
sort of thing----
    Senator McCaskill. Right.
    Mr. Carroll [continuing]. I think that would be ideal.
    Senator McCaskill. OK, Senator Johnson.
    Senator Johnson. Mr. Sparks, you, to me, spoke the magic 
words here--prevention and deterrence. If there is a criteria 
that we really ought to be looking at as we try and design 
something here to take care of the small agencies, prevention 
and deterrence would probably be at the top of the list in 
terms of how we design this thing because you are a lot better 
off preventing and deterring than you are mopping up a fraud 
after the fact.
    So, Mr. Carroll, we were talking about the required audits, 
required inspections. Do any of these small agencies have any 
of those?
    In other words, if they do not have an IG office, are those 
inspections and are those audits being performed?
    Mr. Carroll. Well, I am glad you asked the question because 
it is a mixed bag. For example, we have had discussions with 
the smaller agencies on whether some of this applies to them.
    IPERA, for example. There are discussions with the 
foundations. Does, in fact, the IPERA legislation apply to 
them?
    And so we would say yes, but then we have to direct them to 
OMB to get the final answer.
    So that is why I think that if you capture all of these 
agencies under the IG Act, then the ambiguity is completely 
cleared up.
    The other thing I would say, Senator, related to 
prevention. We have a very robust program in USAID OIG--and I 
am sure the other agencies do as well--of what we call fraud 
awareness. We have our auditors and investigators go out and 
brief agency employees and brief agency contractors on what 
fraud looks like.
    And, inevitably, we are going to get calls on the hotline 
or people come right up to us--I saw that. And then they become 
a source, and then we create an investigation or an audit.
    So I do believe that--and I am not knocking the smaller 
IGs, but we have a very robust fraud awareness program/
prevention program, and we have the expertise to implement 
that.
    And I am not saying that the DFE IGs do not. But, 
certainly, when you have scale, then you can wall off those 
resources available to do those kinds of things that are not 
audits and are not investigations.
    Senator Johnson. In the private sector, we have something 
called the Keep It Simple, Stupid (KISS) principle.
    To me, it makes perfect sense that if you are gaining your 
authority from multiple years, multiple layers of rules and 
regulation, it makes an awful lot of sense to centralize that 
authority under one act----
    Mr. Carroll. Agreed.
    Senator Johnson [continuing]. So that simplifies things.
    And then, if there is some way, whether to use CIGIE or 
maybe within a newly created office of Inspector General for 
smaller agencies, if you also have some sort of gathering 
space, an accumulator of best practices, in terms of fraud 
prevention, fraud notification, just education, that is what we 
have to look for. That is what I think would be far more 
effective. Mr. Sparks.
    Mr. Sparks. Just to comment on deterrence and prevention, 
which I totally agree with, I mean, one of the things you look 
at--and I am sure folks have--is you look at the small IGs and 
you look at some of the audit reports, you are going to see in 
the tables a lot of zeroes, where there are not big monetary 
benefits.
    Well, a lot of the small IGs are in regulatory agencies 
that are not putting out--that are having specific programs or 
they are mediating things. I think the key to a smaller IG is 
the prevention and deterrent.
    Where we have grant programs, like my agency, we have 
dollars because you are looking at questioned costs and 
ineligible costs.
    If you talk to the agency head that I have, he would tell 
you the greatest benefit of our office is we go out to 25 or 30 
grantees a year and do grant audits of contractors. And all 
those grantees of the 400 grants a year we make, they think we 
are coming.
    I put it with Internal Revenue Service (IRS) audits. There 
are very few personal tax audits of people now, but most people 
worry about an IRS audit and they make out their taxes 
correctly.
    And I think the benefit of a small IG is not that they have 
a two-person staff or a three-person staff. It is how 
effectively they use that in prevention and deterrent. If you 
can accomplish that, you have accomplished the biggest mission 
at the most value you are going to have.
    You are never going to see the small IGs with big dollars.
    On the investigative side, I think the impact of our 
investigations and the magnitude are probably a lot less 
because we have smaller agencies and smaller dollars. And we 
try to use another IG with the expertise in the investigation 
field and in that area to do it, and I think, we have been 
fairly successful.
    One quick comment since you may recognize I am a little 
biased on smaller IGs. On the administrative cross, I have not 
run into a problem. We do use our human resources (HR)--our 
agency for H.R. services. Obviously, we get counsels from other 
IGs if we need them.
    It can be a problem. I have not really seen it because our 
costs are relatively small because we have a small staff.
    And one of the things I wanted to mention before we 
conclude is I thoroughly agree with the discussion you had 
where you talked about having GAO look at the mandate in 
reviews.
    What are required of IGs at small agencies?
    Senator McCaskill. Right.
    Mr. Sparks. How much staff is put in a financial statement 
and Federal Information Management System monitoring?
    We have to let the contracts. Is a one-year audit required 
of a small entity?
    And I think looking at that because when you ask what are 
we responsible for we have a lot of mandated requests from 
Congress for financial statement audits, improper payments, 
travel, credit card use.
    And, generally, a lot of times, the legislation comes down 
and says all IGs will do a review.
    I know we had one about use of government vehicles. Well, 
we have one leased vehicle used part-time. That is not going to 
affect the ecology of the world.
    But I think looking at the mandated things for IGs is a 
good initiative.
    I would also look at the mandated audits that a small 
entity is required to do. A lot of these small entities that 
you are looking at, I think, do require financial statement 
audits.
    Now do they need them every year? Do they need IG 
monitoring every year? I think we can get to a point of over-
monitoring and over-auditing, and there have to be risk 
assessments to see how bad it is, just like there should be a 
risk assessment of how much staff is going to be required to 
service these new entities that you are looking at to put into 
it.
    Senator Johnson. OK. Well, again, I appreciate your 
testimony. I think you are exactly the kind of folks we ought 
to be talking to in depth, in detail, as we craft this so we 
can engage in those best practices so that the dollars that we 
put to use are put to effective use, as well as the personnel 
time.
    So, again, I appreciate the testimony and appreciate the 
hearing.
    Senator McCaskill. I do, too, and I think we will begin 
working in earnest to come up with a proposal that makes the 
most sense without disrupting the IG community too much.
    I would appreciate, Ms. Gustafson, if you would check with 
CIGIE about formalizing recommendations they might have, 
particularly if there is any appetite for CIGIE being used as 
something other than what it is now.
    Could they be the clearinghouse for assigning auditors to 
small agencies on an ongoing basis? Does it make sense?
    I agree with Mr. Sparks. A recipe for disaster would be 
having CIGIE have to decide what the audit findings were going 
to be. I would not want to be in that room. I think there might 
be some serious disagreements.
    But we would like to get some formal input from CIGIE on 
the proposed legislation and whether or not it should be 
tweaked or changed in any way and maybe look at, seriously, a 
model of an Inspector General for Small Agencies and what that 
might look like also.
    We are going to try to move this. I think honestly this is 
something we could get passed. I cannot imagine that we would 
find something to fight about over providing a minimal amount--
--
    Senator Johnson. We might.
    Senator McCaskill. We might, but I do not think so.
    Senator Johnson. No. This is just a good government piece 
of legislation.
    Senator McCaskill. Yes, especially if Senator Johnson and I 
stay joined at the hip on not going too far but going far 
enough.
    And I think removing some of the mandates for these smaller 
agencies is a terrific thing to do. It is stupid that you are 
having to spend a lot of time on paperwork for a partially one 
leased vehicle because we have mandated that.
    We ought to have it like what we did with banks. I mean, if 
you were under a certain amount of assets, we relieved them of 
some of the responsibilities in Dodd-Frank.
    We should do the same thing on these mandates. If you are 
under a certain threshold, we should look at those mandates and 
see if they really make sense.
    So we welcome--and GAO, too; your input is essential, Ms. 
Davis--all of you, if you would help us craft this in a way 
that makes sense and will accomplish the goals I think we all 
hold in common, which is making sure that we do not have 
agencies out there that know nobody is going to knock on their 
door.
    I do not like any government agency not thinking somebody 
is going to knock on their door. Ever.
    Mr. Carroll. Senator, could I just make one more comment?
    I wanted to thank you personally for your trust and faith 
in the statutory IGs with the National Defense Authorization 
Act (NDAA), the 2013 NDAA, and the OCO legislation.
    I just talked to Jon Rymer and Steve Linick and we 
guarantee that we will be able to deliver, God forbid, in the 
next overseas contingency operation. So thank you very much for 
that.
    Senator McCaskill. That is great. And I am hoping I do not 
have to be here to hold you to that.
    I am hoping we do not have another OCO, but we probably 
will.
    And no one is going to be more angry than I am if we do not 
have lessons learned. This has been a painful process to get 
lessons learned in the contingency space.
    By the way, you should know, Mr. Carroll, I am pressing the 
Pentagon on this as to whether or not they really can justify 
the infrastructure endeavors they have undertaken in a 
contingency with a counterinsurgency effort. I am not convinced 
that the AIF or that the SERP money on steroids has, in fact, 
been effective.
    And this notion that we keep transferring back and forth 
form AID to Defense, AID to Defense--who is building the 
highway? Who is building the health center?
    It is mind-boggling how this has gone back and forth, 
without rhyme or reason and without any data to support it.
    So I am on them, and I am asking them, you better show us 
where the data is that makes any sense for the military to be 
doing this infrastructure as opposed to AID.
    As you can tell, I can get jazzed about that.
    And, by the way, that is billions and billions of dollars.
    Mr. Carroll. That it is.
    Senator McCaskill. So it is real big money.
    Thank you all very much for your service and the jobs you 
hold and for your time today. We appreciate it.
    [Whereupon, at 12:05 p.m., the Subcommittee was adjourned.]


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