Inspectors General: Department of Defense IG Peer Reviews	 
(20-DEC-01, GAO-02-252R).					 
								 
A peer review is required by Government Auditing Standards at	 
least once every three years by an organization not affiliated	 
with the organization being reviewed. The 1997 peer review of the
Department of Defense (DOD) Inspector General (IG) was performed 
by the Environmental Protection Agency IG and resulted in a	 
qualified opinion issued. The peer review report stated that the 
DOD IG's quality assurance system was inadequate and that the	 
reviewed audits did not fully comply with Government Auditing	 
Standards. The 2000 peer review was performed by the Department  
of the Treasury IG for Tax Administration (TIGTA) and resulted in
an unqualified opinion in August 2000. Although TIGTA noted a	 
number of isolated problems, the peer review report stated that  
the DOD's IG quality assurance system provided reasonable	 
assurance of compliance with auditing standards. However, after  
the peer review had been completed, the DOD IG, TIGTA, the Office
of Management and Budget, the Chairman of the Senate Armed	 
Services Committee, and representatives of the media, received a 
letter dated December 2000, that questioned the integrity of the 
documentation that the DOD IG provided to the TIGTA peer review  
staff. Subsequently, a DOD IG internal investigation was	 
completed in February 2001, and confirmed that the work papers	 
for one of the audits selected for peer review had been 	 
inappropriately altered and destroyed. The report concluded that 
these inappropriate actions violated Government Auditing	 
Standards, internal DOD IG audit policies, and the expectations  
of the external peer review staff. Based on this information,	 
TIGTA first withdrew the 2000 peer review opinion in March 2001, 
and then issued a disclaimer of opinion in May 2001, citing an	 
inability to determine whether the substantiated allegations	 
would materially affect the DOD IG's system of quality control.  
Because of these actions, the DOD IG did not meet the Government 
Auditing Standards requirement for obtaining a peer review at	 
least once every three years. Beginning in early June 2001, the  
DOD IG began qualifying audit reports it issued to explain the	 
lack of compliance with the peer review requirements as set forth
in Government Auditing Standards. The DOD obtained the 2001 peer 
review from the Department of Health and Human Services (HHS) IG 
and received a qualified opinion in November 2001. Similar to the
results in 1997, the 2001 peer review report stated that the	 
quality assurance system needs improvement and that audits were  
not always in compliance. Consequently, the DOD IG received a	 
qualified opinion.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-252R					        
    ACCNO:   A02612						        
  TITLE:     Inspectors General: Department of Defense IG Peer Reviews
     DATE:   12/20/2001 
  SUBJECT:   Auditing standards 				 
	     Inspectors general 				 
	     Audit reports					 
	     Audits						 
	     Quality assurance					 
	     Quality control					 

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GAO-02-252R
     
GAO- 02- 252R DOD IG Peer Reviews

United States General Accounting Office Washington, DC 20548

December 20, 2001 The Honorable Charles E. Grassley United States Senate

Subject: Inspectors General: Department of Defense IG Peer Reviews Dear
Senator Grassley: This letter and its enclosure respond to your request for
information about the peer reviews of the Department of Defense Inspector
General (DOD IG). A peer review, known as an external quality control
review, is required by Government Auditing Standards 1 to be performed at
least once every 3 years by an organization not affiliated with the
organization being reviewed. The objective of a peer review is to determine
whether the organization?s internal quality control system is in place and
operating effectively to provide reasonable assurance that established
policies and procedures and applicable auditing standards are being
followed.

As agreed with your staff, we are providing information about the results of
the peer reviews of the DOD IG completed in 1997, 2000, and 2001 and our
monitoring of the performance of the 2001 peer review as it was performed.
In order to meet these objectives, we reviewed the peer review work papers
and interviewed the IG peer review staff from the Environmental Protection
Agency (EPA), the Department of the Treasury IG for Tax Administration
(TIGTA), and the Department of Health and Human Services (HHS). We also
reviewed the work papers from the DOD IG?s own internal investigation
regarding allegations that work papers for the 2000 peer review had been
altered, and we interviewed DOD IG officials regarding the results of that
investigation and the results of the peer reviews. To monitor the 2001 peer
review, we met with the HHS IG peer review staff and discussed the
additional peer review steps taken; attended key meetings between HHS IG and
DOD IG officials; interviewed the HHS IG peer review staff on the results of
their review; and reviewed the HHS IG peer review work papers. On December
17, 2001, we provided your staff with a briefing covering the above
information. This letter transmits the materials used for that briefing.

The 1997 peer review of the DOD IG was performed by the EPA IG and resulted
in a qualified opinion issued on December 10, 1997. The peer review report
stated that the DOD IG?s quality assurance system was inadequate and that
the reviewed audits

1 Government Auditing Standards, 1994 revision, as amended, was issued by
the Comptroller General of the United States. IGs are required to follow
these standards in their audit work.

Page 2 GAO- 02- 252R DOD IG Peer Reviews did not fully comply with
Government Auditing Standards. For example, the EPA

IG found that the DOD IG had not completed sufficient internal quality
reviews; some audits lacked sufficiently documented supervision; audit
programs were not always prepared; independent referencing of the facts in
DOD IG reports was not always done; and summary information was not always
cross- referenced to the work papers.

The 2000 peer review was performed by TIGTA and resulted in an unqualified
opinion on August 9, 2000. While TIGTA noted a number of isolated problems,
the peer review report stated that the DOD IG?s quality assurance system
provided reasonable assurance of compliance with auditing standards.
However, after the 2000 peer review had been completed, you, the DOD IG,
TIGTA, the Office of Management and Budget, the then Chairman of the Senate
Armed Services Committee, and others, including representatives of the
media, received serious allegations in a letter dated December 14, 2000,
that questioned the integrity of the documentation that the DOD IG had
provided to the TIGTA peer review staff. Subsequently, the DOD IG performed
an internal investigation which was completed on February 14, 2001. The IG?s
internal investigation confirmed that work papers for one of the audits
selected for peer review had been inappropriately altered and destroyed. The
report concluded that these inappropriate actions violated Government
Auditing Standards, internal DOD IG audit policies, and the expectations of
the external peer review staff. Based on this information, TIGTA first
withdrew the 2000 peer review opinion on March 15, 2001, and then issued a
disclaimer of opinion on May 25, 2001, citing an inability to determine
whether the substantiated allegations would materially affect the DOD IG?s
system of quality control.

As a consequence of these actions, the DOD IG did not meet the Government
Auditing Standards requirement for obtaining a peer review at least once
every 3 years. Beginning in early June 2001, the DOD IG began qualifying
audit reports it issued to explain the lack of compliance with the peer
review requirements set forth in Government Auditing Standards.

The DOD IG obtained the 2001 peer review from the HHS IG and received a
qualified opinion on November 19, 2001. At the request of your staff, we
monitored the performance of the 2001 peer review and the additional steps
taken by the HHS IG staff in consideration of the DOD IG?s past peer review
results and the previous altering of work papers provided to the TIGTA peer
review staff. These additional steps included obtaining the DOD IG work
papers for the selected audits without providing any advance notification to
the DOD IG staff about which audits had been selected; obtaining
attestations from the DOD IG audit managers that the work papers under
review had not been altered; issuing a questionnaire to DOD IG audit staff
for information about audit quality; increasing the number of sampled audits
for review; and increasing the emphasis on financial audits, which were the
type of audit for which work papers had been altered for the TIGTA peer
review. These additional steps by the HHS IG were sound and appropriate
given the results of the previous peer review and the seriousness of the
confirmed allegations.

Page 3 GAO- 02- 252R DOD IG Peer Reviews Similar to the results in 1997, the
2001 peer review report stated that the DOD IG

quality assurance system needs improvement and that audits were not always
in compliance with Government Auditing Standards. For example, the DOD IG
had not completed sufficient internal quality reviews; supervision was not
always documented; audit plans were not always documented; work papers were
not always completed; and the DOD IG auditors did not have sufficient
independence on one audit. Consequently, the DOD IG received a qualified
opinion.

The 2001 peer review recommended that the DOD IG implement a comprehensive
corrective action plan, implement new policies and procedures, and schedule
the next external quality control review in 2 years. The DOD IG?s response
to the peer review includes an action plan intended to address the
weaknesses identified. Specifically, in accordance with the action plan, the
DOD IG requires work paper documentation of audit planning; has established
the Quality Management Council consisting of the senior executive service-
level audit personnel to monitor audit quality; requires evidence of
supervision before referencing of the facts in a report can begin; and
requires certification that the work papers are complete before the final
report is issued. In addition, the DOD IG will study and adopt a best
practice used by other audit organizations to ensure auditor independence.
Under the peer review guidance used by the IGs, the implemented results of
this plan are to be reviewed during the next peer review, which the DOD IG
has agreed will be completed within the next 2 years.

We obtained comments on a draft of this letter and the attached briefing
slides from IG officials at DOD, EPA, TIGTA, and HHS, who all agreed with
our presentation of the information. Our review was performed from June
through November 2001, in accordance with generally accepted government
auditing standards.

If you have any questions, please contact me at (202) 512- 2600 or by e-
mail at steinhoffj@ gao. gov or Jeanette M. Franzel, Acting Director, at
(202) 512- 9471, or by e- mail at franzelj@ gao. gov. Key contributors to
this letter and the enclosure were Jackson Hufnagle, James Pittrizzi, and
Clarence Whitt.

Sincerely yours, Jeffrey C. Steinhoff Managing Director Financial Management
and Assurance

Enclosure

Page 4 GAO- 02- 252R DOD IG Peer Reviews

Enclosure Page 5 GAO- 02- 252R DOD IG Peer Reviews

1 Financial Management and Assurance Team

Inspectors General: Department of Defense IG Peer Review Briefing for The
Honorable Charles E. Grassley U. S. Senate

Enclosure Page 6 GAO- 02- 252R DOD IG Peer Reviews

2 Introduction/ Objectives

You requested us to provide information about the peer reviews of the DOD
IG. As agreed with your staff, our objectives were to provide information
about the following:

*peer review requirements and purpose 1997, 2000, and 2001 peer reviews of
the DOD IG

Enclosure Page 7 GAO- 02- 252R DOD IG Peer Reviews

3 Scope and Methodology

In order to meet our objectives we

reviewed peer review work papers,

interviewed IG staff performing the peer reviews,

interviewed DOD IG staff regarding the peer review results,

reviewed work papers from DOD IG?s internal investigation,

interviewed DOD IG staff regarding their internal investigation, and

monitored the performance of the 2001 peer review as it was performed.

Enclosure Page 8 GAO- 02- 252R DOD IG Peer Reviews

4 Scope and Methodology

We conducted our work from June through November 2001, in accordance with
generally accepted government auditing standards.

We obtained comments on a draft set of these briefing slides from IG
officials at DOD, EPA, TIGTA, and HHS, who agreed with our presentation of
the information.

Enclosure Page 9 GAO- 02- 252R DOD IG Peer Reviews

5 Peer Review Requirements and Purpose

required by Government Auditing Standards at least once every 3 years

performed by another federal audit organization

purpose is to determine if the quality control system provides reasonable
assurance that policies, procedures, and auditing standards are being
followed

Enclosure Page 10 GAO- 02- 252R DOD IG Peer Reviews

6 Peer Review Requirements and Purpose

Types of opinions possible for peer review:

unqualified opinion

qualified opinion

adverse opinion

disclaimer of opinion

Enclosure Page 11 GAO- 02- 252R DOD IG Peer Reviews

7 1997 Peer Review of the DOD IG

Environmental Protection Agency (EPA) IG staff performed the peer review.

Qualified opinion was issued on December 10, 1997.

Enclosure Page 12 GAO- 02- 252R DOD IG Peer Reviews

8 1997 Peer Review of the DOD IG

Peer review report stated that the DOD IG?s quality assurance was
inadequately designed and implemented. Weaknesses were found in the
following areas:

audit quality control

supervision audit programs

independent referencing

cross- referencing of summaries

Enclosure Page 13 GAO- 02- 252R DOD IG Peer Reviews

9 2000 Peer Review of the DOD IG

Treasury Inspector General for Tax Administration (TIGTA) staff performed
the peer review.

Unqualified opinion was issued on August 9, 2000, however, TIGTA?s
management letter identified isolated problems.

Allegation letter dated December 14, 2000, stated that work papers for an
audit selected for peer review had been altered by DOD IG staff.

Enclosure Page 14 GAO- 02- 252R DOD IG Peer Reviews

10 2000 Peer Review of the DOD IG

DOD IG?s internal investigation confirmed allegations on February 14, 2001,
and found that DOD IG staff inappropriately altered and destroyed work
papers for an audit selected for peer review.

DOD IG staff inserted newly created work papers for an audit selected for
peer review without the knowledge of the peer reviewers.

Enclosure Page 15 GAO- 02- 252R DOD IG Peer Reviews

11 2000 Peer Review of the DOD IG

TIGTA withdrew its unqualified opinion on March 15, 2001.

TIGTA issued a disclaimer of opinion on May 25, 2001.

DOD IG did not meet requirements for a peer review every 3 years as set
forth in Government Auditing Standards.

DOD IG qualifies its own audit reports indicating the lack of compliance
with peer review requirements.

Enclosure Page 16 GAO- 02- 252R DOD IG Peer Reviews

12 2001 Peer Review of the DOD IG

Performed by Department of Health and Human Services (HHS) IG staff.

Qualified opinion was issued on November 19, 2001.

Enclosure Page 17 GAO- 02- 252R DOD IG Peer Reviews

13 2001 Peer Review of the DOD IG

Peer review report stated that the DOD IG?s quality control policies and
procedures were not always followed in the following areas:

audit planning

audit quality control

supervision work papers Also, auditor independence procedures were not
appropriately designed.

Enclosure Page 18 GAO- 02- 252R DOD IG Peer Reviews

14 2001 Peer Review of the DOD IG

HHS IG staff took the following additional steps in the 2001 peer review in
consideration of the DOD IG?s past peer review results:

Work papers for selected audits were obtained without prior notice to the
DOD IG staff.

DOD IG managers attested that work papers under review had not been
altered.

DOD IG auditors completed an audit quality questionnaire.

Additional audits were selected for review with an increased emphasis on
financial audits.

Enclosure Page 19 GAO- 02- 252R DOD IG Peer Reviews

15 2001 Peer Review of the DOD IG

DOD IG action plan intended to address peer review findings includes actions
already taken and planned:

improved work paper documentation for audit planning

Quality Management Council to monitor quality

evidence of supervisory review before referencing

certification that work papers are complete before the report is issued,
and certification will be tested by management

study and adoption of best practices used by other audit organizations to
ensure independence

Enclosure Page 20 GAO- 02- 252R DOD IG Peer Reviews

16 Future Actions

 DOD IG will obtain another peer review in 2 years.

 The next peer review is required to review implementation of DOD IG?s
corrective actions.

(194051)
*** End of document. ***