Single Audit: Refinements Can Improve Usefulness (Testimony, 03/29/96,
GAO/T-AIMD-96-77).

GAO discussed proposed amendments to the Single Audit act of 1984 and
the act's importance. GAO noted that: (1) Congress enacted the act in
response to state and local governments' poor accounting practices and
lack of accountability for federal funds; (2) audits were not uniform
and some grantees were subjected to multiple annual audits while others
were not audited for long periods of time; (3) state and local
governments have greatly improved their accountability and financial
management under the act; (4) proposed amendments would reduce
administrative burdens on grantees who receive comparatively small
amounts by raising audit thresholds so that audit coverage returns to
the 95-percent level; (5) grantees below the thresholds would still have
to maintain records and be subject to monitoring; (6) the amendments
require the Office of Management and Budget to develop a risk-based
approach to targeting audit resources at higher-risk programs; (7) the
amendments' required summary reports would increase audit timeliness and
usefulness; (8) shortening the audits' due date to 9 months from the
fiscal year's close would also improve the audits' timeliness; (9)
bringing nonprofit organizations under the act would subject all
grantees to uniform requirements; and (10) the proposed amendments would
make the single audits the basis for other audits.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD-96-77
     TITLE:  Single Audit: Refinements Can Improve Usefulness
      DATE:  03/29/96
   SUBJECT:  Financial statement audits
             Proposed legislation
             Accountability
             Financial management
             State governments
             Intergovernmental fiscal relations
             Grant monitoring
             Grant administration
             Federal grants
             Reporting requirements
IDENTIFIER:  New York (NY)
             
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Cover
================================================================ COVER


Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at
9:30 a.m.
Friday,
March 29, 1996

SINGLE AUDIT - REFINEMENTS CAN
IMPROVE USEFULNESS

Statement of Gene L.  Dodaro
Assistant Comptroller General
Accounting and Information Management Division

GAO/T-AIMD-96-77

GAO/AIMD-96-77T


(911706)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss proposed amendments to the
Single Audit Act of 1984.  The single audit is an important means by
which the Congress, federal oversight officials, and program managers
obtain information on whether the recipients of federal assistance
properly account for the federal funds they receive, maintain
adequate internal controls over those funds, and comply with program
requirements.  The single audit, which has gained widespread
acceptance throughout the country, has helped foster fundamental
financial management improvements and strengthened accountability at
state and local governments and nonprofit organizations receiving
federal assistance. 

The 12 years of experience with the Single Audit Act have shown that
refinements can be made to strengthen the usefulness of single audits
while at the same time reducing the burden on state and local
governments and nonprofit organizations.\1 The proposed amendments,
which we strongly support, address these refinements.  Today, I would
like to provide some perspective on the importance of the Single
Audit Act, highlight the results of our most recent assessment of the
act's implementation which recommended ways to improve the single
audit process,\2 and address the specific amendments that are now
being considered. 


--------------------
\1 Nonprofit organizations are not covered by the Single Audit Act
but have single audits pursuant to OMB Circular A-133, "Audits of
Institutions of Higher Education and Other Nonprofit Organizations."

\2 Single Audit:  Refinements Can Improve Usefulness
(GAO/AIMD-94-133, June 21, 1994). 


   PERSPECTIVES ON WHY THE SINGLE
   AUDIT ACT WAS ENACTED
---------------------------------------------------------- Chapter 0:1

During the 1970s, the poor accounting practices of state and local
governments put into question the security of federal funds provided
to those governments.  The 1975 New York City financial crisis
focused increased attention on this problem.  It was found that New
York City consistently overestimated its revenues, underestimated its
expenses, never knew how much cash it had on hand, and borrowed
repeatedly to finance its deficit spending.  Compounding the poor
accountability practices prevalent at that time, for the most part,
state and local governments were not receiving independent financial
statement audits. 

In the early 1980s, the Congress became increasingly concerned about
a basic lack of accountability for federal assistance provided to
state and local governments.  The assistance grew from 132 programs
costing $7 billion in 1960 to over 500 programs costing nearly $95
billion by 1981.  In 1984, when the Single Audit Act was signed into
law, federal assistance to state and local governments had risen to
$97 billion, more than doubling what it was a decade before. 

Before passage of the act, the federal government relied on audits of
individual grants to help gain assurance that state and local
governments and nonprofit organizations were properly spending
federal assistance.  These audits focused on whether the transactions
of specific grants complied with their program requirements.  The
audits usually did not address financial controls and were,
therefore, unlikely to find systemic problems with an entity's
management of its funds.  Further, grant audits were conducted on a
haphazard schedule, which resulted in large portions of federal funds
being unaudited each year.  The auditors conducting grant audits did
not coordinate their work with the auditors of other programs.  As a
result, some entities were subject to numerous grant audits each year
while others were not audited for long periods.\3

As a solution, the concept of the single audit was created to replace
multiple grant audits with one audit of an entity as a whole.  Rather
than being a detailed review of individual grants or programs, the
single audit is an organizationwide audit that focuses on accounting
and administrative controls.  The single audit was meant to advise
federal oversight officials and program managers on whether an
entity's financial statements are fairly presented and to provide
reasonable assurance that federal assistance programs are managed in
accordance with applicable laws and regulations.  At the time the
Single Audit Act was enacted, it received strong bi-partisan support
in the Congress and from state and local governments. 

The objectives of the Single Audit Act are to

  improve the financial management of state and local governments
     receiving federal financial assistance;

  establish uniform requirements for audits of federal financial
     assistance provided to state and local governments;

  promote the efficient and effective use of audit resources; and

  ensure that federal departments and agencies, to the extent
     practicable, rely upon and use audit work done pursuant to the
     act. 

The act requires each state and local entity that receives $100,000
or more in federal financial assistance (either directly from a
federal agency or indirectly through another state or local entity)
in any fiscal year to undergo a comprehensive, single audit of its
financial operations.  The audit must be conducted by an independent
auditor on an annual basis, except under specific circumstances where
a biennial audit is allowed.\4 The act also requires entities
receiving between $25,000 and $100,000 in federal financial
assistance to have either a single audit or a financial audit
required by the programs that provided the federal funds.\5

Further, where state and local entities provide $25,000 or more in
federal financial assistance to other organizations ("subrecipients"
of federal funds) they are required by the act to monitor those
subrecipients' use of the funds.  This monitoring can consist of
reviewing the results of each subrecipient's audit and ensuring that
corrective action is taken on instances of material noncompliance
with applicable laws and regulations. 


--------------------
\3 For more information on problems with grant audits, see GAO
report, Grant Auditing:  A Maze of Inconsistency, Gaps, and
Duplication That Needs Overhauling (FGMSD-79-37, June 16, 1979). 

\4 Entities may arrange for biennial single audits if, when the
Single Audit Act was enacted, they were required by constitution or
statute then in effect to conduct their audits less frequently than
annually.  They may also arrange for biennial single audits if the
requirement for such less frequent audits was administrative at the
time the act was enacted and was codified by January 1, 1987.  In
either case, audits conducted biennially are to cover both years
within the audit period. 

\5 State and local entities receiving less than $25,000 in federal
funds in any fiscal year are not required to have a financial audit. 


   THE SINGLE AUDIT HAS
   CONTRIBUTED GREATLY TO BETTER
   FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 0:2

Over the past 12 years, single audits have clearly proved their worth
as important accountability tools over the hundreds of billions of
dollars that the federal government provides to state and local
governments and nonprofit organizations each year.  As discussed in
our June 1994 report, the Single Audit Act has encouraged recipients
of federal funds to review and revise their financial management
practices.  This has resulted in the state and local governments
institutionalizing fundamental reforms, such as (1) preparing annual
financial statements in accordance with generally accepted accounting
principles, (2) obtaining annual independent comprehensive audits,
(3) strengthening internal controls over federal funds and compliance
with laws and regulations, (4) installing new accounting systems or
enhancing old ones, (5) implementing subrecipient monitoring systems
that have greatly improved oversight of entities to whom they have
distributed federal funds, (6) improving systems for tracking federal
funds, and (7) resolving audit findings. 

The single audit process has proven to be an effective way of
promoting accountability over federal assistance because it provides
a structured approach to achieve audit coverage over the thousands of
state and local governments and nonprofit organizations that receive
federal assistance.  Moreover, particularly in the case of block
grants--where the federal financial role diminishes and management
and outcomes of federal assistance programs depend heavily on the
overall state or local government controls--the single audit process
provides accountability by focusing the auditor on the controls
affecting the integrated federal and state funding streams. 

At the same time, areas of improvement in the single audit process
have been identified through the thousands of single audits conducted
annually and a consensus has been developed on the needed solutions. 
I would now like to highlight these areas and strongly support the
proposed amendments you are considering which would strengthen the
single audit process.  Last December we testified before the Senate
Governmental Affairs Committee\6 in support of changing the Single
Audit Act.  Those changes are reflected in S.1579, the Single Audit
Act Amendments of 1996--a bill which is identical to the amendments
you are now considering.  Today, I will focus on the two main areas
of improvement: 

  ensuring adequate coverage of federal funds without placing an
     undue administrative burden on entities receiving smaller
     amounts of federal funds; and

  making single audits more useful to the federal government. 


--------------------
\6 Financial Management:  Continued Momentum Essential To Achieve CFO
Act Goals (GAO/T-AIMD-96-10, December 14, 1995). 


   ENSURING ADEQUATE AUDIT
   COVERAGE WHILE REDUCING BURDEN
---------------------------------------------------------- Chapter 0:3

The criteria for determining which entities are to be audited is
based solely on dollar amounts, which have not changed since the
Act's passage in 1984.  The initial dollar thresholds were designed
to ensure adequate audit coverage of federal funds without placing an
undue administrative burden on entities receiving smaller amounts of
federal assistance.  In 1984, the dollar threshold criteria for
entities ensured audit coverage for 95 percent of all direct federal
assistance to local governments.  Today, the same criteria cover 99
percent of all federal assistance to local governments.  As a result,
some local governments that receive comparatively small amounts of
federal assistance are required to have financial audits. 

If the thresholds were raised, as is proposed in the amendments,
audit coverage of 95 percent of federal funds to local governments
could be maintained while roughly 4,000 local governments that now
have single audits would be exempt in the future.  More than 80
percent of the federal program managers we interviewed in preparing
our 1994 report favored raising the thresholds to at least the levels
proposed in the amendments.  We strongly support the proposed change
and believe it strikes the proper balance between cost-effective
accountability and risk. 

Entities that fall below the audit threshold would still be required
to maintain and provide access to records of the use of federal
assistance.  Also, those entities would continue to be subject to
monitoring activities which could be accomplished through site
visits, limited scope audits, or other means.  Further, federal
agencies could conduct or arrange for audits of the entities. 

The act's current criteria for selecting programs to be covered as
part of a single audit focuses solely on dollars expended and does
not consider all risk factors.  In our 1994 report, we noted that
less than 20 percent of the programs in our sample met the selection
criteria regardless of whether they would be considered high risk. 
However, those few programs provided 90 percent of the entities'
federal expenditures.  At the same time, programs that could be
considered risky because of their complexities, changed program
requirements, or previously identified problems would not have to be
covered.  The proposed amendments would require OMB to develop a
risk-based approach to target audit resources at the higher risk
programs as well as focusing on the dollars expended.  We strongly
support this change and note that the overwhelming majority of
federal managers we interviewed agreed with this proposal. 


   ENHANCING THE USEFULNESS OF
   SINGLE AUDITS
---------------------------------------------------------- Chapter 0:4

The proposed amendments include two primary changes to enhance the
content and timeliness of single audit reports. 

First, single audit reports contain a series of as many as seven or
more separate reports, and significant information is scattered
throughout the separate reports.  Presently, there is no requirement
for a summary although several state auditors (for example,
California's state auditor) prepare summary reports. 

In this regard, as discussed in our 1994 report, 95 percent of the
federal program managers we interviewed were very supportive of
summary reports.  Managers said that a summary report would save them
time and enable them to more quickly focus on the most important
problems the auditors found.  The proposed amendments address this
need by requiring auditors to provide a summary of their
determinations concerning the audited entity's financial statements,
internal controls, and compliance with federal laws and regulations. 
We support their enactment. 

Second, entities now have 13 months from the end of the fiscal year
to submit their single audit reports to the federal government.  The
proposed amendments would shorten this to 9 months.  The amendments
would require OMB to establish a transition period of at least 2
years for entities to comply with the shorter time frame.  After the
transition period, federal agencies could authorize an entity to
report later than 9 months, consistent with criteria issued by OMB. 
We strongly support these provisions.  Of the officials we surveyed,
84 percent of the federal program managers and 64 percent of the
state program managers believe the 13-month time frame is excessive. 
Moreover, in fiscal year 1991, 44 percent of state and local
governments were able to submit their reports within 9 months after
the end of their fiscal years.  Over time, I hope that it will be the
rule, rather than the exception, for the audit reports to be
submitted in less than 9 months. 


   ADDITIONAL PROVISIONS
---------------------------------------------------------- Chapter 0:5

The proposed amendments would also expand the Single Audit Act to
include nonprofit organizations, thereby placing all entities
receiving federal funds under the same ground rules.  Presently, the
Single Audit Act applies only to state and local governments while
nonprofit organizations are administratively required to have single
audits under OMB Circular A-133, "Audits of Institutions of Higher
Education and Other Nonprofit Organizations." OMB is in the final
stages of revising Circular A-133 to parallel the requirements of the
proposed amendments to the Single Audit Act.  The proposed amendments
would provide a statutory basis for consistent, common requirements
for state and local governments and nonprofit organizations.  We
strongly support this change. 

The proposed amendments would also reinforce one of the goals of the
act to use single audits as the foundation for other audits. 
Combined with summary reporting, the ability of federal agencies to
review single audit working papers, and make necessary copies, can
provide valuable information in their oversight of federal assistance
programs. 


-------------------------------------------------------- Chapter 0:5.1

In closing, a number of organizations have worked for some time in
gaining consensus on how to make the single audit process as
efficient and effective as possible.  The proposed amendments you are
now considering represent that consensus and have broad support among
stakeholder groups, including the National State Auditors Association
and the President's Council on Integrity & Efficiency which
represents the federal inspectors general.  The Single Audit Act has
been very successful.  The amendments build on that success based on
lessons learned and changed conditions over the past 12 years.  We
encourage the enactment of the proposed amendments and commend the
Subcommittee for focusing on this important issue.  Mr.  Chairman, we
would be pleased to work with the Subcommittee as it considers the
amendments to the Single Audit Act.  I would be happy to answer any
questions that you or members may have at this time. 

*** End of document. ***