Inspectors General: Enhancing Federal Accountability (08-OCT-03, 
GAO-04-117T).							 
                                                                 
On the 25th anniversary of passage of the Inspector General (IG) 
Act, Congress sought GAO's views on the role of the IGs in	 
providing independent oversight within federal agencies and to	 
discuss the new and continuing challenges faced by government	 
performance and accountability professionals.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-117T					        
    ACCNO:   A08675						        
  TITLE:     Inspectors General: Enhancing Federal Accountability     
     DATE:   10/08/2003 
  SUBJECT:   Accountability					 
	     Federal agencies					 
	     Inspectors general 				 
	     Strategic planning 				 
	     Productivity in government 			 
	     Audits						 

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GAO-04-117T

United States General Accounting Office

GAO Testimony

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

For Release on Delivery
Expected at 2:00 p.m. EDT INSPECTORS GENERAL
Wednesday, October 8, 2003

                        Enhancing Federal Accountability

Statement of David M. Walker Comptroller General of the United States

                                       a

GAO-04-117T

October 8, 2003

INSPECTORS GENERAL

Enhancing Federal Accountability

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

On the 25th anniversary of passage of the Inspector General (IG) Act, the
Subcommittee sought GAO's views on the role of the IGs in providing
independent oversight within federal agencies and to discuss the new and
continuing challenges faced by government performance and accountability
professionals.

In order to enhance the effectiveness of federal accountability
professionals, Congress may wish to consider establishing, through
statute, a small group of designated federal accountability officials,
such as representatives from GAO and IG councils, to develop and implement
a periodic strategic planning and ongoing coordination process for the
manner in which GAO and IG work will be focused to provide oversight to
high-risk areas and significant management challenges across government,
while leveraging each other's work and minimizing duplication.

Congress may also want to consider enacting legislation making agencies
responsible for paying the cost of their financial statement audits.

Congress may also wish to consider restructuring the IGs, which would
include elevating certain IGs to presidential appointment and
consolidating specific IG offices where benefits can be shown.

www.gao.gov/cgi-bin/getrpt?GAO-04-117T. To view the full product, click on
the link above. For more information, contact Jeanette Franzel at (202)
512-9406 or [email protected].

The IGs have made a significant difference in federal performance and
accountability during the past 25 years as indicated by their reports of
billions of dollars in savings to the public and numerous civil and
criminal referrals. They have earned a solid reputation for preventing and
detecting fraud and abuse; promoting improvements in government
operations; and providing helpful analyses on a host of governmentwide
initiatives.

Notwithstanding the accomplishments of the past, our nation now faces new
challenges that demand even more from government performance and
accountability professionals. For example, we are fighting international
terrorism while facing a large and growing structural deficit. In
addition, recent corporate failures have shaken public confidence in
financial reporting and accountability in the private sector. Federal
auditors can learn important lessons from the accountability breakdowns in
the private sector and the resulting legislation passed by Congress.

Closer strategic planning and ongoing coordination of audit efforts
between GAO and the IGs would help to enhance the effectiveness and impact
of work performed by federal auditors. Working together and in our
respective areas of expertise in long-term challenges and agency-specific
issues, GAO and the IGs can provide useful insights and constructive
recommendations on a broad range of high-risk programs and significant
management challenges across government.

A practical issue that has arisen is who pays the cost of agency financial
statement audits. Many IGs have told us that the cost of agency financial
audits has taken resources away from their traditional work. In the
private sector, the cost of financial audits is a routine business expense
borne by the entity being audited and represents a small percentage of
total expenditures for the audited entity.

In a prior study, we considered the benefits of consolidating the smallest
IG offices with those of presidentially appointed IGs and converting
agency-appointed IGs to presidential appointment where their budgets were
comparable. We believe that, if properly implemented, conversion or
consolidation of IG offices could increase the overall independence,
economy, efficiency, and effectiveness of IGs.

Mr. Chairman and Members of the Committee:

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

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

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

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

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

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

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

My statement today will focus on five main points:

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

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

o  the IG role in federal financial management advisory committees,

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

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

The Need for an Enhanced Strategic Partnership between the IGs and GAO

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

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

o  addressing major management challenges and program risks,

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

o 	conducting the audit of the government's consolidated financial
statements.

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

Major Management GAO's latest high-risk report,2 released in January 2003,
highlights areas Challenges and Program across government that are at risk
either due to their high vulnerability to Risks waste, fraud, abuse, and
mismanagement, or as major challenges

associated with the economy, efficiency, and effectiveness of federal
programs, policies, processes, functions, or activities. Many of the
high-risk

1These councils were established by Executive Order and are described
later in this testimony.

2U.S. General Accounting Office, High Risk Series: An Update, GAO-03-119
(Washington, D.C.: January 2003).

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

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

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

President's Management Agenda

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

Key policymakers increasingly need to think beyond quick fixes and
carefully consider what the proper role of the federal government should
be in the 21st century. Members of Congress and agency heads can start by
undertaking a top-to-bottom review of federal programs and policies to
determine which should remain priorities, which should be overhauled, and
which have outlived their usefulness or are just no longer affordable
given more pressing demands. Everything that forms the government's base
must be on the table, including tax, spending, and regulatory policies.
Policymakers will need to distinguish "wants," which are optional, from
"needs," which can be urgent. They need to make hard choices that take
into account what the American people will support and what the federal
government can afford and sustain over time. To make informed decisions,
Congress and agency heads will require hard facts and professional
analyses that are objective, fact based, timely, accurate, nonpartisan,
fair, and balanced. GAO and the IGs are important sources of such
objective information and analyses.

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

Audit of the U.S. Government's Consolidated Financial Statements

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

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

audit, which by necessity is based largely on the results of the IGs'
agency-level audits.

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

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

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

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

and that we would have been able to use the work without having to perform
additional audit procedures. The IG has an oversight team composed of
senior-level staff who perform moderate-level quality control reviews of
the contracted IPA's work throughout the audit process. The oversight team
evaluates its IPA in areas such as audit planning and execution, audit
documentation, and staff qualifications. These types of practices could be
shared and expanded upon across the IG community. As an initial step to
make the IG and IPA audit process stronger and enhance GAO's ability to
use their work in rendering an opinion, we are considering holding a forum
with the IGs and the IPAs to share information-based on GAO's review of
the IG and IPA work-regarding best practices and areas to focus on that
need additional audit work, and to establish a framework for enhanced
coordination of the financial statement audit work.

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

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

auditor opinions on internal control are a critical component of
monitoring the effectiveness of an entity's risk management and
accountability systems. We also believe that auditor opinions on internal
control are appropriate and necessary for major public entities such as
the CFO Act agencies currently included in the U.S. government's
consolidated financial statements.

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

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

4The three agencies receiving opinions on internal control for fiscal year
2002 are the Social Security Administration, General Services
Administration, and Nuclear Regulatory Commission.

5Pub. L. No. 107-204, 116 Stat. 745 (2002).

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

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

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

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

the audit and avoid the "heroic" audit efforts that we have seen in the
past at some agencies.

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

  The IG Role in Federal Financial Management Advisory Committees

We envision an important role for the IGs in audit or financial management
advisory committees established at the federal agency level for the
purpose of overseeing an agency's financial management, audits, and
performance.

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

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

The concept of financial management advisory committees is very similar to
the audit committee structure being used in the private sector. To help
facilitate the audit process and promote disclosure and transparency, the
governing boards of publicly traded companies use audit committees. Audit
committees generally oversee the independent audit of the organization's
financial statements and address financial management, reporting, and
internal control issues. The Sarbanes-Oxley Act has requirements for the
audit committees of publicly traded companies and their auditors regarding
communications and resolution of significant audit matters.

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

  Structural Streamlining to Increase Resource Efficiencies

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

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

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

Potential IG Office Consolidations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  Matters for Congressional Consideration

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

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

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

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

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

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

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

Mr. Chairman, that concludes my prepared statement. I would be happy to respond
        to any questions you or Members of the Subcommittee might have.

Appendix I

The Inspector General Act

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

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

o  No central leadership of auditors and investigators existed.

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

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

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

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

Appendix I
The Inspector General Act

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

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

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

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

Appendix II

                     Inspector General Budgets and Staffing

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

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

16 Department of Energy 32,000,000 250
17 Agency for International Development 32,000,000 166
18 Federal Deposit Insurance Corporation 32,000,000 201
19 Department of State 29,000,000 234
20 National Aeronautics and Space Administration 24,000,000 200
21 Department of Commerce 21,000,000 136
22 Small Business Administration 12,000,000 108
23 Department of the Treasury 12,000,000 87
24 Office of Personnel Management 11,000,000 89
25 Tennessee Valley Authority 7,000,000 87
26 Nuclear Regulatory Commission 6,000,000 41
27 Railroad Retirement Board 6,000,000 51
28 Corporation for National and Community Service 5,000,000 16
29 Central Intelligence Agencyb na na
Total $1,426,000,000 10,429
Source: Budget authority and FTEs from Fiscal Year 2004 Budget of the U.S.
Government.
aIncludes budget authority to combat health care fraud.
bBudget and FTE information not available.

Appendix II
Inspector General Budgets and Staffing

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

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

Appendix II
Inspector General Budgets and Staffing

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

Fiscal year Department/agency IG 2002 budgets

Department of Health and Human Servicesa $227,000,000

Department of Defense 151,000,000

Treasury's IG for Tax Administration 130,000,000

U.S. Postal Serviceb 117,324,000

Department of Housing and Urban Development 95,000,000

Department of Agriculture 75,000,000

Social Security Administration 75,000,000

Department of Labor 67,000,000

Department of Justice 65,000,000

                  10 Department of Veterans Affairs 57,000,000

                   11 Department of Transportation 50,000,000

                 12 Department of Homeland Security 47,000,000

                 13 Environmental Protection Agency 46,000,000

                     14 Department of Education 39,000,000

                    15 Department of the Interior 37,000,000

                 16 General Services Administration 36,000,000

17 Department of Energy 32,000,000 18 Agency for International Development
32,000,000 19 Federal Deposit Insurance Corporation 32,000,000 20
Department of State 29,000,000 21 National Aeronautics and Space
Administration 24,000,000 22 Department of Commerce 21,000,000 23
Department of the Treasury 12,000,000 24 Small Business Administration
12,000,000 25 Office of Personnel Management 11,000,000 26 Amtrakb
8,706,539 27 Tennessee Valley Authority 7,000,000 28 National Science
Foundationb 6,760,000 29 Nuclear Regulatory Commission 6,000,000 30
Railroad Retirement Board 6,000,000 31 Corporation for National and
Community Service 5,000,000 32 Federal Reserve Board b 3,878,000 33
Central Intelligence Agency c na Total $1,562,668,539

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

Appendix II
Inspector General Budgets and Staffing

Note: The four comparable agency appointed IGs are in bold.
aIncludes budget authority to combat health care fraud.
bInformation supplied by the ECIE.
cBudget information not available.

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