Inspectors General: Limitations of IG Oversight at the Department
of State (31-OCT-07, GAO-08-135T).				 
                                                                 
GAO was asked to provide testimony about the effectiveness and	 
reliability of the State Department's Office of Inspector General
(State IG). We focused on the independence of the State IG, the  
use of inspections instead of audits to provide oversight of the 
department, and the effectiveness of the IG's investigative	 
function. The testimony is based primarily on our March 2007	 
report, Inspectors General: Activities of the Department of State
Office of Inspector General (GAO-07-138).			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-135T					        
    ACCNO:   A77870						        
  TITLE:     Inspectors General: Limitations of IG Oversight at the   
Department of State						 
     DATE:   10/31/2007 
  SUBJECT:   Audit oversight					 
	     Audit reports					 
	     Auditing standards 				 
	     Information technology				 
	     Inspection 					 
	     Inspectors general 				 
	     Internal audits					 
	     Internal controls					 
	     Investigations by federal agencies 		 
	     Quality control					 
	     Reporting requirements				 
	     Standards						 
	     Policies and procedures				 

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GAO-08-135T

   

     * [1]Background
     * [2]Importance of Auditor and IG Independence
     * [3]Continuing Concerns regarding the State IG's Independence
     * [4]State IG's Reliance on Inspections Results in Gaps in Audit
     * [5]Department Lacks Assurance of Obtaining Independent IG Inves
     * [6]Concluding Observations
     * [7]Contacts and Acknowledgments
     * [8]GAO's Mission
     * [9]Obtaining Copies of GAO Reports and Testimony

          * [10]Order by Mail or Phone

     * [11]To Report Fraud, Waste, and Abuse in Federal Programs
     * [12]Congressional Relations
     * [13]Public Affairs

                 United States Government Accountability Office

GAO                          Testimony Before the Subcommittee on          
                                International Organizations, Human Rights,    
                                and Oversight, Committee on Foreign Affairs,  
                                House of Representatives   
										                     
For Release on Delivery      INSPECTORS GENERAL                            
Expected at 2:00 p.m. EDT                                                  
Wednesday, October 31, 2007                                                
                                Limitations of IG Oversight at the Department 
                                of State                                      
                                
										  Statement of David M. Walker
										  Comptroller General of the United States                  

                                  GAO-08-135T

INSPECTORS GENERAL

Limitations of IG Oversight at the Department of State

  What GAO Found

The effectiveness of the oversight provided by the State IG is limited by

(1) a lack of resources, (2) structural independence issues, (3) gaps in
audit coverage, and (4) the lack of assurance that the department obtains
independent IG investigations. These limitations serve to reduce the
credibility and oversight provided by the State IG.

From fiscal years 2001 through 2006, the State Department's budgets have
increased from $13.7 billion to about $24 billion, an increase of almost
75 percent (or 55 percent in constant dollars adjusted for inflation) in
order to manage an expanding role in the global war on terrorism. During
this same period, the State IG's budget increased from $29 million to $31
million, which when adjusted for inflation is a decrease of about 6
percent in constant dollars. In addition, of the 318 authorized staff in
the State IG's fiscal year 2006 budget, the actual onboard staff averaged
182, or about 57 percent of the authorized level and about 20 percent less
than in fiscal year 2001.

We continue to identify concerns regarding the independence of the State
IG that are similar to concerns we reported almost three decades ago.
Independence is critical to the quality and credibility of all the work of
the State IG and is one of the most important elements of the overall
effectiveness of the IG function. Our concerns include (1) the appointment
of line management officials to head the State IG in an acting capacity
for extended periods, and (2) the use of ambassador-level Foreign Service
staff to lead inspections of the department's bureaus and posts even
though they may have conflicts of interest resulting from their roles in
the Foreign Service.

In addition, because the State IG provides oversight coverage of high-risk
areas and management challenges primarily through inspections rather than
audits, the department has significant gaps in audit oversight. Compared
to audits, oversight provided by inspections is fundamentally limited. To
illustrate, the Inspector General Act requires the State IG to follow
Government Auditing Standards, while use of inspection standards are
voluntary. In addition, unlike auditing standards, inspection standards do
not require an external peer review of quality. The State IG's ratio of
inspections to audits in fiscal year 2005 was 2 to 1 while the ratio for
the statutory federal IG community was about 1 to 10. We reviewed 10 of
the State IG's inspections performed over fiscal years 2004 and 2005 and
found that they relied heavily on questionnaires completed by management
at each bureau or post being inspected without verification or testing for
accuracy.

We also found that investigations of the State Department lack a formal
written agreement between the State IG and DS. Such an agreement is
critical to help ensure that investigations of internal department
operations are performed by the IG and not by bureau investigators who
report to department management.

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the activities of the Department
of State Office of Inspector General (State IG), which is responsible for
providing oversight of the department, the Broadcasting Board of
Governors, the foreign affairs community, and more than 260 embassies,
consulates, and other posts worldwide. The State IG has a critical
responsibility to provide effective and objective oversight to assist both
the department and the Congress.

In our March 2007 ^[14]1 report on the activities of the State IG, we
raised a number of concerns about the lack of adequate resources, the
independence of the office, the lack of audit oversight in high-risk
areas, and the lack of assurance that the department is receiving
independent investigations.

My statement today is based primarily on our March report and recent
testimonies ^[15]2 we have provided on the need for effective inspector
general (IG) offices. I will discuss in more detail (1) the importance of
auditor and IG independence, (2) independence concerns regarding the State
IG that are similar to those we reported almost three decades ago, (3)
gaps in State IG audit coverage in some high-risk areas due to the IG's
reliance on inspections, and (4) a lack of assurance that investigations
within the State Department are independent of management. We performed
this work in accordance with generally accepted government auditing
standards.

                                   Background

The current State IG was created by a 1986 amendment to the Inspector
General Act of 1978 (IG Act) to prevent and detect fraud, waste, abuse,
and mismanagement in the department's programs and operations; conduct and
supervise independent audits and investigations; and recommend policies to
promote economy, efficiency, and effectiveness. Unique to the State IG is
a requirement to provide inspections of the department's Foreign Service
posts, bureaus, and operating units. The
State Department has had inspection functions in various forms since 1906.
The function has changed and evolved over the years in response to
numerous statutory changes.

^1GAO, Inspectors General: Activities of the Department of State Office of
Inspector General, GAO-07-138 (Washington, D.C.: Mar. 23, 2007).

^2GAO, Inspectors General: Proposals to Strengthen Independence and
Accountability, GAO-07-1021T (Washington, D.C.: June 20, 2007), and
Inspectors General: Opportunities to Enhance Independence and
Accountability, GAO-07-1089T (Washington, D.C.: July 11, 2007).

Since the terrorist attacks of September 11, 2001, the State Department
has become involved in expanded reconstruction and stabilization roles and
manages a global presence that includes mobilizing some 180 countries and
territories in the war on terrorism. To manage this expanded role, the
State Department's budget has increased over fiscal years 2001 through
2006 from $13.7 billion to about $24 billion, an increase of about 75
percent (55 percent in constant dollars adjusted for inflation). At the
same time, the State IG's budget has been inadequate and its workforce has
declined by approximately 20 percent. For example, from 2001 to 2006, the
State IG's budget for oversight has increased from $29 million to $31
million, which when considered relative to inflation, is a budget decrease
of approximately 6 percent over 6 years in constant dollars. During that
same period, the State IG's staffing level has declined from 227 to 182.
Of the 318 authorized staff in the State IG's fiscal year 2006 budget, the
actual onboard staff averaged 182, or about 57 percent of the authorized
level. (See fig. #1.)

In the State Department's Performance and Accountability Report ^[16]3 for
fiscal year 2006, the State IG reported the need for expanded oversight to
encompass new department initiatives in transformational diplomacy, global
repositioning, and public diplomacy, as well as substantial increases in
programs for Iraq and Afghanistan, counternarcotics, counterterrorism,
embassy construction, and information technology. In addition, the IG has
noted significant growth in the number of programs and grants with
mandated IG oversight, congressional and management requests for special
reviews and investigations, and opportunities for joint activities with
other departments.

^3United States Department of State, Performance and Accountability  Report,
Fiscal Year 2006.

Figure 1: State Department and IG Resources for Fiscal Years 2001 through
2006

Sources: OMB, State IG.

The 1986 amendment that created the current IG office was a reaction to
concerns expressed in prior GAO reports in 1978 and 1982. In those
reports, we raised concerns about the independence of the previous IG
offices established administratively by the department and through
statutes prior to 1986. ^[17]4 At the same time, our concerns about the
State IG's independence were based in part on the IG's use of temporarily
assigned Foreign Service officers to staff the IG office for performing
inspections.

                   Importance of Auditor and IG Independence

We continue to be concerned about the independence of the State IG, an
issue that we first reported on almost three decades ago. Independence is
the cornerstone of professional auditing. Without independence, an audit
organization cannot conduct independent audits in compliance with
generally accepted government auditing standards (Government Auditing
Standards). Likewise, an IG who lacks independence cannot effectively
fulfill the full range of requirements for the office. Lacking this
critical attribute, an audit organization's work might be classified as
studies, research reports, consulting reports, or reviews, rather than
independent audits.

Independence is one of the most important elements of an effective IG
function. In fact, much of the IG Act provides specific protections to IG
independence that are unprecedented for an audit and investigative
function located within the organization being reviewed. These protections
are necessary in large part because of the unusual reporting requirements
of the IGs, who are both subject to the general supervision and budget
processes of the agencies they audit, while at the same time being
expected to provide independent reports of their work externally to the
Congress.

Government Auditing Standards ^[18]5 states, "in all matters relating to
the audit work, the audit organization and the individual auditor, whether
government or public, must be free from personal, external, and
organizational impairments to independence, and must avoid the appearance
of such impairments to independence. Auditors and audit organizations must
maintain independence so that their opinions, findings, conclusions,
judgments, and recommendations will be impartial and
viewed as impartial by objective third parties with knowledge of the
relevant information." [Emphasis added.]

^4GAO, State Department's Office of Inspector General, Foreign Service,
Needs to improve Its Internal Evaluation Process, ID-78-19 (Washington,
D.C.: Dec. 6, 1978), and State Department's Office of Inspector General
Should Be More Independent and Effective, GAO/AFMD-83-56 (Washington,
D.C.: June 2, 1982).

^5GAO, Government Auditing Standards, January 2007 Revision, GAO-07-162G,
Secs. 3.02 and 3.03 (Washington, D.C.: January 2007).

     o Personal independence applies to individual auditors at all levels of
       the audit organization, including the head of the organization.
       Personal independence refers to the auditor's ability to remain
       objective and maintain an independent attitude in all matters relating
       to the audit, as well as the auditor's ability to be recognized by
       others as independent. The auditor needs an independent and objective
       state of mind that does not allow personal bias or the undue influence
       of others to override the auditor's professional judgments. This
       attitude is also referred to as intellectual honesty. The auditor must
       also be free from direct financial or managerial involvement with the
       audited entity or other potential conflicts of interest that might
       create the perception that the auditor is not independent.
     o External independence refers to both the auditor's and the audit
       organization's freedom to make independent and objective judgments
       free from external influences or pressures. Examples of impairments to
       external independence include restrictions on access to records,
       government officials, or other individuals needed to conduct the
       audit; external interference over the assignment, appointment,
       compensation, or promotion of audit personnel; restrictions on funds
       or other resources provided to the audit organization that adversely
       affect the audit organization's ability to carry out its
       responsibilities; or external authority to overrule or to
       inappropriately influence the auditors' judgment as to appropriate
       reporting content.
     o Organizational independence refers to the audit organization's
       placement in relation to the activities being audited. Professional
       auditing standards have different criteria for organizational
       independence for external and internal audit organizations. The IGs,
       in their statutory role of providing oversight of their agencies'
       operations, represent a unique hybrid of external and internal
       reporting responsibilities.

The IG Act requires IGs to perform audits in compliance with Government
Auditing Standards. In addition, much of the act provides specific
protections to IG independence for all the work of the IGs. Protections to
IG independence include the requirement that IGs report only to their
agency heads and not to lower-level management, ^[19]6 and a prohibition
on the ability of the agency head to prevent or prohibit the IG from
initiating, carrying out, or completing any audit or investigation. This
prohibition is meant to protect the IG office from external forces that
could compromise an IG's independence. The IG's personal independence and
the need to appear independent to knowledgeable third parties is also
critical when the IG makes decisions related to the nature and scope of
audit and investigative work performed by the IG office. The IG must
determine how to utilize the IG Act's protection of independence in
conducting and pursuing the audit and investigative work. The IG's
personal independence is necessary to make the proper decisions in such
cases.

^6The head of  the agency may  delegate supervision  of the IG  only to  the
officer next in rank below the agency head.

The IG Act also provides the IG with protections to external independence
by providing access to all agency documents and records, prompt access to
the agency head, the ability to select and appoint IG staff, the authority
to obtain services of experts, and the authority to enter into contracts.
The IG may choose whether to exercise the act's specific authority to
obtain access to information that is denied by agency officials. Again,
each IG must make decisions regarding the use of the IG Act's provisions
for access to information, and the IG's personal independence becomes key
in making these decisions.

The IGs' external reporting requirements in the IG Act include reporting
the results of their work in semiannual reports to the Congress. Under the
IG Act, the IGs are to report their findings without alteration by their
respective agencies, and these reports are to be made available to the
general public. The IG Act also directs the IGs to keep their agency heads
and the Congress fully and currently informed, which they do through these
semiannual reports and otherwise, of any problems, deficiencies, abuses,
fraud, or other serious problems relating to the administration of
programs and operations of their agencies. Also, the IGs are required to
report particularly serious or flagrant problems, abuses, or deficiencies
immediately to their agency heads, who are required to transmit the IG's
report to the Congress within 7 calendar days.

With the growing complexity of the federal government, the severity of the
problems it faces, and the fiscal constraints under which it operates, it
is important that an independent, objective, and reliable IG structure be
in place at federal agencies to ensure adequate audit and investigative
coverage of federal programs and operations. The IG Act provides each IG
with the ability to exercise judgment in the use of protections to
independence specified in the act. While the IG Act provides for IG
independence, the ultimate success or failure of an IG office is largely
determined by the individual IG placed in that office and that person's
ability to maintain personal, external, and organizational independence
both in fact and appearance while reporting the results of the office's
work to both the agency head and to the Congress. An IG who lacks
independence cannot effectively fulfill the full range of requirements for
the office.

           Continuing Concerns regarding the State IG's Independence

Two continuing areas of concern that we have with the independence of the
office of the State IG involve (1) the appointment of management officials
to head the State IG in an acting capacity for extended periods of time
and (2) the use of Foreign Service staff to lead State IG inspections.
These concerns are similar to those independence issues we reported in our
1978 and 1982 reports.

In 1978, GAO reviewed the operations of the office of the IG of Foreign
Service and questioned the independence of Foreign Service officers who
were temporarily detailed from program offices to the IG's office. In
1982, we reviewed the operations of the IG and again expressed our
concerns about the independence of inspection staff reassigned to and from
management offices within the department. In these reports we stated that
the desire of State IG staff to receive favorable assignments after their
State IG tours could influence their objectivity. Reacting to concerns
similar to those in our 1982 report, the Congress established an IG for
the Department of State through amendments to the IG Act in both 1985 and
1986. The 1986 amendment requires the State IG continue to perform
inspections of the department's bureaus and posts, but also prohibits a
career member of the Foreign Service from being appointed as the State IG.

After almost three decades, we continue to have similar concerns regarding
the independence of the State IG's operations. In our March 2007 report we
stated that during a period of approximately 27 months-- from January 24,
2003, until May 2, 2005--four management officials from the State
Department were acting in an IG capacity. All four of these officials
served in the Foreign Service in prior line management positions,
including political appointments as U.S. ambassadors to foreign countries.
In addition, three of these officials returned to significant management
positions within the State Department after heading the IG office.
Therefore, over more than a 2-year period, oversight of the State
Department was being provided by the department's own management
officials. The 1986 amendment to the IG Act that created the current IG
office prohibits a career Foreign Service official from becoming an IG of
the State Department due to concerns about personal impairments to
independence that could result. That same concern exists when Foreign
Service officials head the State IG in an acting capacity, resulting in
limitations to the independence and effectiveness of the office.

The second continuing concern discussed in our March 2007 report regarding
State IG independence deals with the use of Foreign Service officers to
lead inspections of the department's bureaus and posts. This practice
creates the mistaken impression that because these inspections are
products of an IG office, they are performed with the appropriate IG
independence. However, State IG policy is for inspections to be led by
Foreign Service officers at the ambassador level who are expected to help
formulate, implement, and defend government policy. The resulting conflict
of interest for career Foreign Service staff and others at the ambassador
level who lead inspections that may criticize the department's policies
provides an appearance of impaired independence to the State IG's
inspection results.

To address these concerns about the independence of the State IG Office,
we recommended in our March 2007 report that the IG work with the
Secretary of State to develop a succession planning policy that would
prohibit career Foreign Service officers and other department managers
from heading the State IG office in an acting capacity and to develop
options to ensure that State IG inspections are not led by career Foreign
Service officials or other staff who rotate to assignments within State
Department management.

In formal comments to a draft of our March 2007 report, the State IG
agreed with our concerns about having career Foreign Service officers
serving in an acting IG capacity and acknowledged that the temporary
nature of such arrangements can have a debilitating effect on the office
particularly over a lengthy period of time. However, the State IG
disagreed with our recommendation that personnel with State Department
management careers also not be considered for acting IG positions due to
the need to obtain prompt and capable personnel to fill these positions.
Also, the State IG agreed that use of Foreign Service personnel at the
ambassador level to lead inspections does create an appearance of impaired
independence; however, the IG plans to continue this practice in order to
utilize the diplomatic expertise of these Foreign Service officers, which
the IG believes is necessary for inspections.

We disagree with the State IG's comments. Independence is a critical
element for IG effectiveness and success and is at the heart of auditing
standards and the IG Act. The State IG's reluctance to take steps that
would preclude career management officials from leading the office in an
acting IG capacity and to stop the practice of having Foreign Service
officers at the ambassador level lead inspections weakens the credibility
of the entire office. For example, appointing career department managers
as acting State IGs could have the practical effect of subjecting the
State IG to supervision by management officials other than the Secretary
or Deputy Secretary. As noted above, the IG Act limits supervision of the
IG to the head of the department or the principal deputy rather than
lowerlevel managers as an important protection to the IG's independence.

In addition, the State IG's decision to accept impairments to the
appearance of independence for all inspections performed at the department
limits the usefulness of these results for both the department and the
Congress in taking appropriate actions. We agree that Foreign Service
expertise could be a part of the inspection team, but we disagree with
placing independence second to experience and expertise. The State IG can
achieve both objectives with the proper staffing and structuring of its
inspections. To illustrate, our position remains that the State IG's
inspection teams should not be led by career Foreign Service officers and
ambassadors, but could include experienced ambassadors and staff at the
ambassador level as team members, consultants, or advisors to help
mitigate concerns about the appearance of independence caused by the State
IG's current practice.

 State IG's Reliance on Inspections Results in Gaps in Audit Oversight for High
                                   Risk Areas

In addition to the specific requirements for independent audits and
investigations, the State IG has a unique statutory requirement to inspect
each post at least every 5 years. However, since 1996, the Congress,
through the department's appropriations acts, annually waives the 5-year
requirement. Nevertheless, the State IG completed inspections at 223 of
the department's 260 bureaus and posts over the 5-year period of fiscal
years 2001 through 2005. Consequently, the State IG relies on inspections
rather than audits to provide the primary oversight of the State
Department. As a comparison, in fiscal year 2005, the statutory IGs ^[20]7
issued a total of 443 inspection reports compared to 4,354 audit reports,
a ratio of inspections to audits of about 1 to 10. During the same year,
the State IG issued 99 inspection reports and 44 audit reports during
fiscal year 2005, or a ratio of inspections to audits of over 2 to 1.

^7There are  currently 64  statutory IG  offices in  the federal  government
created by the IG Act, as amended, and other legislation.

A troubling outcome of the State IG's heavy emphasis on inspections is the
resulting gaps in audit coverage for high-risk areas we have identified
and the management challenges reported annually by the State IG in the
department's performance and accountability reports. In our reports of the
government's high-risk areas issued in January 2003 ^[21]8 and January
2005, ^[22]9 we identified seven such areas at the State Department, which
were also included in management challenges identified by the State IG.
^[23]10 These critical areas are (1) the physical security and protection
of people and facilities, (2) information security, (3) financial
management, (4) human resources, (5) counterterrorism and border security,
(6) public diplomacy, and (7) postconflict stabilization and
reconstruction.

To illustrate the State IG's reliance on inspections for oversight of
these areas during fiscal years 2004 and 2005 combined, the State IG
covered human resource issues with 1 audit and 103 inspections,
counterterrorism and border security with 2 audits and 190 inspections,
public diplomacy with 2 audits and 103 inspections, and information
security with 1 audit and 13 inspections. (See table 1.) The high-risk
areas of physical security and protection of people and facilities had
limited audit coverage that addressed specific contracts and procurements,
whereas financial management was covered by the State IG's financial
audits. Postconflict stabilization and reconstruction was covered by both
audits and inspections.

^8GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003).

^9GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

^10The Reports Consolidation Act of 2000, Pub. L. No. 106-531, 114 Stat.
2537, 2538 (Nov. 22, 2000), requires executive agencies, including the
State Department, to include their IGs' lists of significant management
challenges in their annual performance and accountability reports to the
President, the Office of Management and Budget, and the Congress.

Table 1: State  IG Audit and  Inspection Coverage of  High-Risk Areas  and
Management Challenges for Fiscal Years 2004 through 2005

Fiscal year 2004 State IG Fiscal year 2005 State IG reports^c reports^d

Management challenges GAO high-risk areas^a identified by the State IG^b
Audits Inspections Audits Inspections

Physical security and Protection of people and 27 98 21 92 management of
U.S. facilitiesfacilitiesoverseas

Enhance information Information security 1 6 0 7technology andsecurity,
strengthen financial management, improve performance planning^e

[0]^f[0]^f

Financial management 10 16

Continue to rightsize embassy Human resources 1 50 0 53staffing levels

Better manage human capital strategies

Strengthen the visa processCounterterrorism and border 0 98 2 92 through
issuance of policiessecurity and proceduresasan antiterrorism tool

Improve the  management of  Public  diplomacy 1  50 1  53public  diplomacy
programs

Manage the large-scale Postconflict stabilization and 4 0 4 6
reconstruction and nation-reconstruction building programs

Total high-risk areas and 44 302 44 303management challenges addressed by
audit and inspection reports

Total audit and inspection 44 104 44 99 reports issued

Source: GAO.

^a[24]aGAO-05-207 a nd [25]GAO-03-119.

^bDepartment of State, Fiscal Year 2005 Performance and Accountability
Report.

^cState IG semiannual reports to the Congress for the periods ending March
31 and September 30, 2004.

^dState IG semiannual reports to the Congress
for the periods ending March 31 and September 30, 2005.

^eStrategic and performance planning were removed in recognition of the
State Department'sconsiderable progress in addressing that challenge.

^fPost inspections include aselected financial management component.

Because of State IG's heavy reliance on inspections, it is important to
note that there are fundamental differences between inspections and
audits. Audits performed under Government Auditing Standards ^[26]11 are
subject to more in-depth requirements in the areas of sufficient,
appropriate, relevant, and complete evidence and documentation supporting
the findings than are inspections performed under the Quality Standards
for Inspections. ^[27]12 Also, auditing standards require independent
external quality reviews of audits, or peer reviews, on a 3-year cycle,
while inspection standards do not call for any such external quality
reviews.

We reviewed the documentation for 10 State IG inspections to gain an
understanding of the extent of documented evidence to support each
report's findings and recommendations. ^[28]13 We found that the
inspectors relied heavily on questionnaires completed by management at
each bureau or post that was inspected, official department documents,
correspondence and electronic mail, internal department memorandums,
interviews, and the inspection review summaries. We did not find any
examples of additional testing of evidence or sampling of agency responses
to questionnaires and interviews to test for the accuracy, relevance,
validity, and reliability of the information as would be required by
auditing standards. In other words, for the inspections we reviewed, the
State IG's results relied on the responses of department management
through questionnaires, interviews, and agency documents without further
verification.

We also found that for 43 of the 183 recommendations contained in the 10
inspections we reviewed, the inspection files did not contain documented
support of any kind beyond the written summaries of the findings and
recommendations contained in the final inspection reports. While the State
IG's inspection policies require that supporting documentation be attached
to the written summaries, the summaries indicated that there was no
additional supporting documentation. Due to the significance of the
high-risk areas covered largely by inspections, the limited nature of
inspections, and the appearance of impaired independence, the State IG
would benefit by reassessing the mix of audit and inspection coverage for
those areas.

^11 IGs are required by the IG Act to follow Government Auditing Standards
when performing audits. 5 U.S.C. App. S 4(b)(1)(A).

^12 Use of inspection standards by the IGs is not mandated by statute. Rather,
IGs are encouraged by the President's Council on Integrity and Efficiency
(PCIE) and the Executive Council on Integrity and Efficiency (ECIE) to
follow the councils' jointly created standards, Quality Standards for
Inspections, when conducting inspections. PCIE is composed principally of
the presidentially appointed and Senate-confirmed IGs, and ECIE is
composed principally of IGs appointed by the heads of designated federal
entities defined by the IG Act. Both were established by Executive Order
to coordinate and enhance the work of the IGs.

^13 The 10 inspections were taken from a total of 112 inspections completed
over fiscal years 2004 and 2005 that were not classified for national
security purposes, and did not include inspections of the Board of
Broadcasting Governors.

In our March 2007 report, we recommended that in order to provide the
appropriate breadth and depth of oversight coverage at the department,
especially in high-risk areas and management challenges, the State IG
reassess the proper mix of audit and inspection coverage. This assessment
should include an analysis of an appropriate level of resources needed to
address the increasing growth of the department's risks and
responsibilities.

In formal comments on our report, the State IG disagreed with our
recommendation to reassess the mix of audit and inspection coverage while
agreeing that inspections are much more subjective than audits and have a
different level of requirements for evidence. The State IG explained that
the use of inspections is due to the congressional mandate for IG
inspections, which has been waived annually late in the IG's planning
cycle, and the limited resources to hire more auditors. Therefore, things
that could be done in an audit have to be done through inspections.

We remain concerned that the State IG's current mix of audits and
inspections does not provide adequate independent oversight. In addition,
the State IG's use of inspections can create an "expectation gap" that
inspections will have the same credibility and independence as the IG's
audits. By ultimately placing the results of inspections in the IG's
semiannual reports without clarifying that they are a substitute for audit
coverage and are fundamentally limited in their results, the IG may be
creating a misleading image of oversight coverage of the department and
its high-risk areas.

     Department Lacks Assurance of Obtaining Independent IG Investigations

The IG Act, as amended, established the State IG to conduct and supervise
independent investigations, in addition to audits, in order to prevent and
detect fraud, waste, abuse, and mismanagement in the State Department.
^[29]14 In addition, the department's Bureau of Diplomatic Security (DS),
as part of its worldwide responsibilities for law enforcement and security
operations, also performs investigations that include passport and visa
fraud both externally and within the department.

While both the State IG and DS pursue allegations of passport and visa
fraud by State Department employees, DS reports organizationally to the
State Department Undersecretary for Management and is performing
investigations as a function of management. Therefore, DS investigations
of department employees, especially when management officials are the
subjects of allegations, can result in management investigating itself. In
contrast, the State IG is required by the IG Act to be independent of the
offices and functions it investigates. However, State IG officials stated
that they were aware of DS investigations in these areas that were not
coordinated with the State IG.

Our March 2007 report noted that DS and the State IG had no functional
written agreement or other formal mechanism in place to coordinate their
investigative activities. Without a formal agreement to outline the
responsibilities of both DS and the State IG regarding these
investigations, there is inadequate assurance that this work will be
coordinated to avoid duplication or that independent investigations of
department personnel will be performed. Moreover, we also reported that in
fiscal year 2005, DS entailed a global force of approximately 32,000
special agents, security specialists, and other professionals who make up
the security and law enforcement arm of the State Department. In contrast,
the State IG, which also has global responsibilities for independent
investigations of the State Department, had a total of 21 positions in its
investigative office with 10 investigators onboard at the time of our
review.

In other federal agencies where significant law enforcement functions like
those of DS exist alongside their IGs, the division of investigative
functions between the agency and the IG is established through written
agreement. Our March report provides examples of formal written agreements
between (1) the U.S. Postal Service IG and the Chief Postal Inspector who
heads the U.S. Postal Inspection Service and (2) the Treasury Inspector
General for Tax Administration and the Internal Revenue Service's Criminal
Investigation. These signed memorandums can serve as models for a formal
agreement between DS and the State IG for delineating jurisdiction in
investigative matters to help ensure that the independence requirements of
the IG Act are implemented.

^14 5 U.S.C. App. S 2.

In order to provide for independent investigations of State Department
management and to prevent duplicative investigations, we recommended in
our March 2007 report that the State IG work with DS and the Secretary of
State to develop a formal, written agreement that delineates the areas of
responsibility for State Department investigations. In comments on our
report, the State IG agreed with this recommendation.

                            Concluding Observations

The mission of the State IG is critical to providing independent and
objective oversight of the State Department and identifying any
mismanagement of scarce taxpayer dollars. However, the effectiveness of
the IG's oversight is limited by the lack of resources, the lack of an
appearance of independence, gaps in audit coverage of high-risk areas, and
the lack of assurance that investigations of internal department
operations are performed by independent IG investigators. We made
recommendations to address each of these areas in our related report (
[30]GAO-07-138) . Overall, our recommendations are intended to assist in
strengthening the IG office and the independence and effectiveness of
oversight of the State Department.

We remain concerned about the weaknesses identified especially in light of
the State IG's response to our March 2007 report. The State IG's comments
to our report defend the status quo, and indicate an inadequate concern
and regard for the independence necessary to provide effective and
credible oversight of the department. Consequently, we reiterated the
importance of our recommendations because of our continuing concerns about
the adequacy of independent oversight provided by the State IG.

Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other members of the subcommittee might
have at this time.

                          Contacts and Acknowledgments

If you have any additional questions on matters discussed in this
testimony, please contact Jeanette Franzel at (202) 512-9471 or by e-mail
at [31][email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony. Other key contributors to this testimony include Jackson
Hufnagle (Assistant Director) and Clarence Whitt.

Appendix I:  A Comparison  of Agency  and IG  Fiscal Year  2006  Budgetary
Resources

Dollars in millions
                                                                 IG budgetary
                                             Agency total      resources as a 
                             IG total budgetary budgetary       percentage of 
                                                                       agency 
No.     Federal departments and    resources resources budgetary resources 
                  agencies                                                    
1    Nuclear Regulatory Commission       $10      $811                1.23 
2    Corporation for National and          8     1,267                0.63 
                  Community                                                   
Service                                                                    
3  Small Business Administration          21     3,950                0.53 
4  Environmental Protection Agency        54    13,383                0.40 
5       Agency for International          47   12,984a                0.36 
                  Development                                                 
6  Department of Justice                  83    33,031                0.25 
7  Department of Commerce                 22    10,764                0.20 
8  Treasury Inspector General for Tax    134    66,964                0.20 
      Administrationb                                                         
9  General Services Administration        48    25,356                0.19 
10 Tennessee Valley Authority (TVA)      15c     9,265                0.16 
11 National Aeronauticsand Space          32    19,881                0.16 
Administration                                                             
12 Department of the Interior             42    27,604                0.15 
13 Department of State                    31   23,985d                0.13 
14 Department of Energy                   42    34,392                0.12 
15  Department of Housing and Urban      114    98,189                0.12 
Development                                                                
16 Department of Homeland Security       120   104,577                0.11 
17 Department of Labor                    71    75,744                0.09 
18 Department of Veterans Affairs         75    88,018                0.09 
19 Railroad Retirement Board               7    11,305                0.06 
20 Department of Agriculture              88   143,228                0.06 
21 Department of Transportation           69   116,769                0.06 
22    Department of Health and Human    512e   947,318                0.05 
                    Services                                                  
23 Department of Education                49   108,823                0.05 
24      Federal Deposit Insurance         23    51,848                0.04 
                  Corporation                                                 
25 Department of Defense - Military      214   756,136                0.03 
26 Social Security Administration         92   630,549                0.01 
27 Office of Personnel Management         18   173,168                0.01 
28 Department of the Treasury             19  389,581f               0.005 
29 Central Intelligence Agency           nag       nag                 nag 
               Source: GAO analysis of OMB data                               
                     Page 17                                      GAO-08-135T 

Note: The agencies presented are those with IGs established by the IG Act
and appointed by the President.

^aTotal budgetary resourcesappearing in the Agency for
International Development's FY 2006 Performance and Accountability Report.

^bThe Treasury Inspector General for Tax Administration is the IG for the
Internal Revenue Service (IRS).

^cAmount for TVA IG is from PCIE.

^dState Department budget does not include amounts for the Broadcasting Board of
Governors.

^eIncludesbudget authority to combat Medicare and Medicaid fraud.

^fDepartment of the Treasury'sbudgetary resources exclude IRS. ^gInformation
is not available.

(194739)

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References

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  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-207
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-03-119
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-138
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