Single Audit: Efforts Underway To Implement 1996 Refinements (Testimony,
05/13/99, GAO/T-AIMD-99-177).

Pursuant to a congressional request, GAO discussed the status of efforts
to implement the Single Audit Act Amendments of 1996, focusing on: (1)
the importance of the 1996 amendments; (2) the actions taken to
implement them; and (3) ways in which the refinements will continue to
evolve and benefit future single audit efforts.

GAO noted that: (1) the concept of the single audit was created to
replace multiple grant audits with one audit of an entity as a whole;
(2) the objectives of the Single Audit Act, as amended, are to: (a)
promote sound financial management, including effective internal
controls, with respect to federal awards administered by non-federal
entities; (b) establish uniform requirements for audits of federal
awards administered by non-federal entities; (c) promote the efficient
and effective use of audit resources; (d) reduce burdens on state and
local governments, Indian tribes, and nonprofit organizations; and (e)
ensure that federal departments and agencies rely upon and use audit
work done pursuant to the act; (3) the 1996 amendments were effective
for audits of recipients' fiscal years ending June 30, 1997, and after;
(4) the refinements cover a range of fundamental areas affecting the
single audit process and single audit reporting, including provisions
to: (a) extend the law to cover all recipients of federal financial
assistance; (b) ensure a more cost-beneficial threshold for requiring
single audits; (c) more broadly focus audit work on the programs that
present the greatest financial risk to the federal government; (d)
provide for timely and summary reporting of audit results; (e) promote
better analyses of audit results through establishment of a federal
clearinghouse and an automated database; and (f) authorize pilot
projects to further streamline the audit process and make it more
useful; (5) in June 1997, the Office of Management and Budget (OMB)
issued Circular A-133, Audits of States, Local Governments, and
Non-Profit Organizations; (6) the Circular establishes policies to guide
implementation of the Single Audit Act 1996 amendments and provides an
administrative foundation for uniform audit requirements for nonfederal
entities that administer federal awards; (7) OMB also issued a revised
OMB Circular A-133 Compliance Supplement; (8) the Compliance Supplement
identifies for single auditors the key program requirements that federal
agencies believe should be tested in a single audit and provides the
audit objective and suggested audit procedures for testing those
requirements; (9) GAO reported in its 1994 report that the Compliance
Supplement had not kept pace with changes to program requirements, and
had only been updated once since it was issued in 1985; (10) GAO
recommended that the Compliance Supplement be updated at least every 2
years; and (11) OMB is now updating this supplement on a more regular
basis.

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

 REPORTNUM:  T-AIMD-99-177
     TITLE:  Single Audit: Efforts Underway To Implement 1996
	     Refinements
      DATE:  05/13/99
   SUBJECT:  Auditing standards
	     Financial management systems
	     Internal controls
	     Accountability
	     Auditing procedures
	     Reporting requirements
	     Intergovernmental fiscal relations
	     Financial statement audits
	     Federal grants
	     Grant monitoring

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AI99177t.book GAO United States General Accounting Office

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

For Release on Delivery Expected at 10 a. m. Thursday, May 13,
1999

SINGLE AUDIT Efforts Underway To Implement 1996 Refinements

Statement of David L. Clark, Jr. Director, Audit Oversight and
Liaison Accounting and Information Management Division

GAO/T-AIMD-99-177

  GAO/T-AIMD-99-177

Page 1 GAO/T-AIMD-99-177

Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to discuss the status of efforts to implement the
Single Audit Act Amendments of 1996. These amendments refined the
single audit requirements enacted 12 years earlier, in 1984. The
1996 refinements and the Office of Management and Budget's (OMB)
implementing guidance provide the underpinnings to improve the
auditing for the more than $300 billion annually of federal
assistance provided to nonfederal entities.

As a result of the 1996 amendments, uniform requirements are now
in place for all federal grant recipients-- state and local
governments, colleges and universities, hospitals, and nonprofit
entities. Many of the audit burdens previously facing these
governments and nonprofit organizations have

been reduced and the audits will be more effective because they
will focus on the programs that present the greatest financial
risk to the federal government. The changes embodied in the 1996
refinements were developed through the collaborative efforts of
the many stakeholders in the single audit process, including OMB,
the federal inspectors general, federal and state program

managers, the state auditors, the public accounting profession,
and us. This Subcommittee played an important role by supporting
the legislation needed to enact those changes. Today, I would like
to provide a perspective on the importance of the 1996 amendments,
describe some of the actions taken to implement them, and discuss
ways in which the refinements will continue to evolve and benefit
future single audit efforts. Because of phased- in effective dates
in the law and in the OMB implementing guidance, it is too early
to fully assess the

effectiveness of refinements. However, this hearing should help to
keep attention on the refinements and ensure that the momentum
achieved thus far in implementing the 1996 amendments continues.
Evolution of the 1996 Refinements

The concept of the single audit was created to replace multiple
grant audits with one audit of an entity as a whole. The single
audit is an organizationwide audit that focuses on internal
control and the recipient's compliance with laws and regulations
governing the federal financial assistance received. The
objectives of the Single Audit Act, as amended, are to

Page 2 GAO/T-AIMD-99-177

 promote sound financial management, including effective internal
controls, with respect to federal awards administered by
nonfederal entities;

 establish uniform requirements for audits of federal awards
administered by nonfederal entities;  promote the efficient and
effective use of audit resources;  reduce burdens on state and
local governments, Indian tribes, and nonprofit organizations; and
ensure that federal departments and agencies, to the maximum
extent practicable, rely upon and use audit work done pursuant to
the act. We studied the single audit process, and in June 1994, we
reported 1 on financial management improvements resulting from
single audits, areas in which the single audit process could be
improved, and ways to maximize

the usefulness of single audit reports. We recommended refinements
to improve the usefulness of single audits through more effective
use of single audit resources and enhanced single audit reporting,
and in March 1996, we testified 2 before this Subcommittee on the
proposed refinements. Subsequently, in July 1996, the refinements
to the 1984 act were enacted. The 1996 amendments were effective
for audits of recipients for fiscal years ending June 30, 1997,
and after. The refinements cover a range of fundamental areas
affecting the single audit process and single audit reporting,
including provisions to

 extend the law to cover all recipients of federal financial
assistance,  ensure a more cost- beneficial threshold for
requiring single audits,  more broadly focus audit work on the
programs that present the

greatest financial risk to the federal government,  provide for
timely reporting of audit results,  provide for summary reporting
of audit results,  promote better analyses of audit results
through establishment of a

federal clearinghouse and an automated database, and  authorize
pilot projects to further streamline the audit process and make it
more useful.

1 Single Audit: Refinements Can Improve Usefulness (GAO/AIMD-94-
133, June 21, 1994). 2 Single Audit: Refinements Can Improve
Usefulness (GAO/T-AIMD-96-77, March 29, 1996).

Page 3 GAO/T-AIMD-99-177

OMB's Role In June 1997, OMB issued Circular A- 133, Audits of
States, Local Governments, and Non- Profit Organizations. The
Circular establishes policies to guide implementation of the
Single Audit Act 1996 amendments and provides an administrative
foundation for uniform audit requirements for nonfederal entities
that administer federal awards. OMB also issued a

revised OMB Circular A- 133 Compliance Supplement. The Compliance
Supplement identifies for single auditors the key program
requirements that federal agencies believe should be tested in a
single audit and provides the audit objective and suggested audit
procedures for testing those requirements. We reported in our 1994
report that the Compliance Supplement had not kept pace with
changes to program requirements, and had only been updated once
since it was issued in 1985. We recommended that the Compliance
Supplement be updated at least every 2 years. OMB is now updating
this supplement on a more regular basis. The initial

Compliance Supplement for audits under the 1996 amendments was
issued in June 1997. A revision was issued for June 1998 audits in
May 1998, and a revision for June 1999 audits was just recently
finalized. We commend OMB for its leadership in developing and
issuing the

guidance and the collaborative efforts of the federal inspectors
general, federal and state program managers, the state auditors,
and the public accounting profession in working with OMB
proactively to ensure that the guidance effectively implements the
1996 refinements.

Key Refinements and Actions to Implement Them

Highlighted below are several of the key refinements and some of
the actions taken to implement them. Law Extended to All
Recipients

The 1984 act did not cover colleges, universities, hospitals, or
other nonprofit recipients of federal assistance. Instead, audit
requirements for these entities were established administratively
in a separate OMB audit circular, which in some ways was
inconsistent with the audit circular that covered state and local
governments. For example, the criteria for determining which
programs received detailed audit coverage were different between
the circulars.

Page 4 GAO/T-AIMD-99-177

The 1996 amendments expanded the scope of the act to include
nonprofit organizations. To implement the 1996 amendments, OMB
combined the two audit circulars into one that provided consistent
audit requirements for all recipients. More Cost- Beneficial
Thresholds

The 1996 refinements and OMB Circular A- 133 require a single
audit for entities that spend $300,000 or more in federal awards,
and exempt any entity that spends less than that amount in federal
awards. 3 Also, the threshold is based on expenditures rather than
receipts.

The Congress intended for the entities receiving the greatest
amount of federal financial assistance disbursed each year to be
audited while exempting entities receiving comparatively small
amounts of federal assistance. To achieve this, a $100,000 single
audit threshold was included in the 1984 act. 4 The fixed
threshold, however, did not take into account future increases in
amounts of federal financial assistance. As a result, over time,
audit resources were being expended on entities receiving
comparatively small amounts of federal financial assistance.

In 1984, we reported that setting the threshold for requiring
single audits at $100,000 would result in 95 percent of all direct
federal financial assistance being covered by single audits. In
1994, we reported that coverage at the same 95 percent level could
be achieved with a $300,000 threshold.

Also, the refinements require the Director of OMB to biennially
review the threshold dollar amount for requiring single audits.
The Director may adjust upward the dollar limitation consistent
with the Single Audit Act's purpose. We supported such a provision
when the amendments were being

considered by the Congress. Exercising this authority in the
future will allow the flexibility for the OMB Director to
administratively maintain the single audit threshold at a
reasonable level without the need for further periodic
congressional intervention. 3 If a recipient receives funds under
only one program, the Single Audit Act amendments allows the
option of a program- specific audit instead of a single audit.

4 The 1984 act included a $25, 000 threshold but gave each entity
that received between $25,000 and $100,000 in federal assistance
an option to have separate audits of each of its federal
assistance programs or a single audit. The 1996 amendments
eliminated the dual thresholds.

Page 5 GAO/T-AIMD-99-177

As a result of these changes, audit attention is focussed more on
entities receiving the largest amounts of federal financial
assistance, while the audit burden is eliminated for many entities
receiving relatively small amounts of assistance. For example,
Pennsylvania reported that this change will still provide audit
coverage for 94 percent of the federal funds spent at the local
level in the state, while eliminating audit coverage for
approximately 1,200 relatively smaller entities in the state.

Broader Risk- Based Focus The 1996 amendments require auditors to
use a risk- based approach to determine which programs to audit
during a single audit. The 1984 act's criteria for selecting
entities' programs for testing were based only on dollar amounts.
The 1996 amendments require OMB to prescribe the risk- based
criteria. OMB Circular A- 133 prescribes a process to guide
auditors based not only on dollar limitations but also on risk
factors associated with programs, including  entities' current and
prior audit experience with federal programs;  the results of
recent oversight visits by federal, state, or local agencies; and

 inherent risk of the program. For practical reasons related to
the audit procurement process, OMB Circular A- 133 allowed
auditors to forgo using the risk criteria in the first year audits
under the 1996 amendments. Therefore, the risk- based approach
will be fully implemented in the second cycle of audits under the

1996 amendments, which started with audits for fiscal years ending
June 30, 1998, and is currently in progress. When fully and
effectively implemented, this refinement is intended to give
auditors greater freedom in targeting risky programs by allowing
auditors to use their professional judgment in weighing risk
factors to decide whether a higher risk program should be covered
by the single audit.

Timely Reporting Under the 1984 act, OMB guidance provided entity
management with a maximum of 13 months from the close of the
period audited to submit the audit report to the federal
government. The 1996 refinements reduce this maximum time frame to
9 months after the end of the period audited. The amendments
provide for a 2- year transition period for meeting the 9- month
submission requirement.

Page 6 GAO/T-AIMD-99-177

OMB's guidelines call for the first audits subject to the revised
reporting time frame to be those covering entities' fiscal years
beginning on or after July 1, 1998, and ending June 30, 1999, or
after. This means that March 31, 2000, will be the first due date
under the new time frame. When fully implemented, this change will
improve the timeliness of single audit report information
available to federal program mangers who are accountable for
administering federal assistance programs. The Congress and
federal oversight officials will receive more current information
on the

recipients' stewardship of federal assistance funds they receive.
Summary Reporting The 1996 amendments require that the auditor
include in a single audit report a summary of the auditor's
results regarding the nonfederal entity's financial statements,
internal controls, and compliance with laws and regulations. This
should allow recipients of single audit reports to focus on the
message and critical information resulting from the audit. OMB
Circular A- 133 requires that a summary of the audit results be
included in a schedule of findings and questioned costs. In 1994,
we reported that neither the Single Audit Act nor OMB's
implementing guidance then in effect prescribed the format for
conveying the results of the auditors' tests and evaluations. At
that time, we found that single audit reports contained a series
of as many as eight or more separate reports, including five
specifically focused on federal financial assistance, and that
significant information was scattered throughout the separate
reports.

OMB Circular A- 133 provides greater flexibility on the
organization of the auditor's reporting than was previously
provided. Taking advantage of this flexibility, the American
Institute of Certified Public Accountants has issued guidance for
practitioners conducting single audits that allows all auditor
reporting on federal assistance programs to be included in one

report and a schedule of findings and questioned costs. Better
Basis for Analyses The 1996 refinements call for single audit
reports to be provided to a

federal clearinghouse designated by the Director of OMB to receive
the reports and to assist OMB in carrying out its responsibilities
through analysis of the reports. The Bureau of the Census was
identified as the Federal Audit Clearinghouse in OMB Circular A-
133.

Page 7 GAO/T-AIMD-99-177

In our 1994 report, we noted that data on the results of single
audits were not readily accessible and discussed the benefits of
compiling the results in an automated database. The clearinghouse
has developed a database and is now entering data from the single
audit reports it has received. As this initiative progresses, it
is expected to become a valuable source of information for OMB,
federal oversight officials, and others regarding the expenditure
of federal assistance.

Pilot Projects The 1996 amendments allow the Director of OMB to
authorize pilot projects to test ways of further streamlining and
improving the usefulness of single audits. We understand that OMB
has recently approved the first pilot project under this
authority. This first pilot, which was proposed by and will be
carried out by the State of Washington, provides for auditing the
state education agency and all school districts in the state as
one combined entity, rather than having about 200 separate single
audits. The Washington State Auditor's office has submitted a
statement for the record that describes in more detail the pilot
project. Our preliminary view is that the pilot has the potential
to both streamline the audit process and to provide a single
report that is more useful to users than the approximately 200
reports it will replace. We fully support testing options for
streamlining and increasing the effectiveness of single audits and
will monitor this and any other pilot projects that are approved
in the future.

We are committed to overseeing the successful implementation of
the 1996 amendments, working closely with all stakeholders in the
single audit process and periodically providing information to the
Congress on the

progress being made on all of the refinements. Mr. Chairman, this
concludes my statement. I will be glad to answer any questions you
or other Members may have at this time.

(911943) Let t er

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