[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE SINGLE AUDIT ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 26, 2002
__________
Serial No. 107-209
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
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WASHINGTON : 2003
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
JOHN SULLIVAN, Oklahoma (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California MAJOR R. OWENS, New York
ADAM H. PUTNAM, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Henry Wray, Senior Counsel
Justin Paulhamus, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 26, 2002.................................... 1
Statement of:
Carter, Thomas A., Assistant Inspector General for Audit
Services, Department of Education.......................... 58
Everson, Mark W., Controller, Office of Management and Budget 15
Hanson, Elizabeth A., Director, Departmental Real Estate
Assessment Center, Department of Housing and Urban
Development................................................ 66
Hinton, Russell W., chair, Single Audit Committee, National
Association of State Auditors, Controllers and Treasurers.. 35
Knickerbocker, Frederick T., Associate Director for Economic
Programs, U.S. Census Bureau............................... 26
Martin, Jack, Chief Financial Officer, Department of
Education.................................................. 45
Thompson, Sally E., Director, Financial Management and
Assurance, U.S. General Accounting Office.................. 4
Letters, statements, etc., submitted for the record by:
Carter, Thomas A., Assistant Inspector General for Audit
Services, Department of Education, prepared statement of... 60
Everson, Mark W., Controller, Office of Management and
Budget, prepared statement of.............................. 17
Hanson, Elizabeth A., Director, Departmental Real Estate
Assessment Center, Department of Housing and Urban
Development, prepared statement of......................... 68
Hinton, Russell W., chair, Single Audit Committee, National
Association of State Auditors, Controllers and Treasurers,
prepared statement of...................................... 38
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Knickerbocker, Frederick T., Associate Director for Economic
Programs, U.S. Census Bureau, prepared statement of........ 28
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, prepared statement of............... 75
Martin, Jack, Chief Financial Officer, Department of
Education, prepared statement of........................... 48
Thompson, Sally E., Director, Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 7
OVERSIGHT OF THE SINGLE AUDIT ACT
----------
WEDNESDAY, JUNE 26, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Miller, Schakowsky and
Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Henry Wray,
senior counsel; Rosa Harris, GAO detailee; Justin Paulhamus,
clerk; Michael Sazonov, Sterling Bentley, Joe DiSilvio, and
Yigal Kerszenbaum, interns; David McMillen, minority
professional staff member; and Ellen Rayner, minority chief
clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
Each year the Federal Government awards billions of dollars
in grants, loans, loan guarantees, property and interest
subsidies to State and local governments and nonprofit
organizations. Last year alone, the Federal Government issued
approximately $325 billion in awards and grants to these
entities. Prior to passage of the Single Audit Act, the Federal
Government required financial audits of each grant program to
ensure that the grant was being appropriately spent. This often
resulted in grant recipients undergoing multiple audits.
For example, if Johns Hopkins University received grants
from several Federal agencies, each grant was audited
separately, often by different audit organizations. Since
passage of the Single Audit Act, the recipient in this example,
Johns Hopkins, undergoes one audit of all its grants and
awards.
The Single Audit Act is intended to promote sound financial
management including effective internal controls over Federal
awards. The act requires audits of grant recipients that
annually expend $300,000 or more in Federal awards.
Each year about 30,000 single audits are performed. These
audits have identified thousands of financial management
weaknesses. It is the Federal Government's responsibility to
ensure that these weaknesses are corrected. It is critical that
the Federal departments and agencies that award these grants
ensure that these
billions of taxpayer dollars are properly spent.
Today we will examine how effectively the Federal
Government is accomplishing this goal. I welcome each of you,
our witnesses, and look forward to your testimony.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. And now if we--as you know, all of the
subcommittees have an oath, and if you'd stand with your people
that back you up as well, the clerk will take their names.
We've got about five, six behind you. Raise your right hand.
[Witnesses sworn.]
Mr. Horn. The clerk will note all of these fine gentlemen
and ladies accepted the oath. Please be seated.
We're going to move very rapidly today, because I have to
be in a mark-up at the Transportation and Infrastructure
Committee at 11 a.m. I'll begin, and then we'll move ahead very
rapidly, and I'm sure you're pleased.
The first witness is Sally Thompson, Director, Financial
Management and Assurance, U.S. General Accounting Office. Nice
to have you here again.
STATEMENT OF SALLY E. THOMPSON, DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE
Ms. Thompson. Thank you, Mr. Chairman, and I'm pleased to
be here to discuss our report, which was conducted at your
request and is being released at this hearing, on the efforts
that Education, HUD and Transportation are doing to assure that
the Federal award recipients take timely and appropriate
actions to correct all single audit findings, and then I would
also like to highlight three issues that merit additional
attention to ensure that the single audit efforts are achieving
the full benefits envisioned by the act.
Single audits are a critical element in the government's
oversight and monitoring of what you mentioned was over $300
billion in Federal awards. In regard to our report, even though
Education, HUD and Transportation had procedures in place to
establish responsibility for identifying and reviewing single
audits, we found little evidence that the three agencies had
actually evaluated and concluded on the adequacy of corrective
actions reported, and then notified recipients of the agency's
positions on the audit findings and the corrected actions. In
other words, there's a statute in place, there's OMB guidance
in place, there's agency policies and procedures, but there is
not accountability. This is not a compliance issue. It's an
accountability issue.
Specifically we've reviewed 60 1999 reports from these
agencies for their biggest programs and their biggest
recipients, and we found 246 audit findings, of which only 30
percent had management decision memos. The OMB circular
requires the agencies to issue decision memos within 6 months
of the receipt of their single audit reports. Even if they were
to issue those management decision memos within 6 months, it
would still be 15 months after the end of the audited period.
Agencies' reasons for not following-up with management
decisions included that they weren't significant, although the
audit requirements very specifically said only significant
findings are reported; and, that they look at subsequent year-
end single audit reports to indicate whether the recipient had
indeed corrected the findings. However, when we add to the 15
months another year, and this is not a timely manner of
following-up on the audit findings to make sure that they're
corrected.
Program officials from the three agencies also told us that
they followup on corrective actions through activities such as
site visits, phone conversations and review, again, of the
subsequent audits. However, we found very little documentation
that demonstrated these activities.
In addition to that, there is no agencywide analysis and
reporting of the single audit information that was performed.
We believe single audits provide valuable information for
agency managers to use in strengthening accountability and
oversight, and performing agencywide analysis of problems that
may be consistent across single audits.
We also feel single audits are another element in the risk
management assessment process to reduce improper payments,
which is a key element in the President's management agenda.
However, when we talked to the agency officials at the three
agencies, they revealed that most of the program managers were
not communicating this information to the top agencies.
We are recommending that the secretary of each of these
agencies implement policies and procedures that clearly define
roles and responsibilities and ensure accountability of timely
and appropriate actions are occurring on all audit findings. We
also feel that this reporting should include information on the
types of audit findings identified in the single audit reports
and the status of those corrective actions. The agency head
could be doing agencywide analysis on these findings.
Now I would like to to talk briefly about three issues that
are of concern to us: Whether all single audits are being
conducted, whether the recipients perform the proper monitoring
of subrecipients, and whether the single audits comply with
auditing standards.
In the audit universe, we generally have an honor system.
We depend on the recipients to arrange the single audits. We
have no government-wide tracking system that accumulates,
tracks and reports the total amount of all awards expended by
an agency or a recipient. This key is essential for being able
to manage across the Federal Government.
Subrecipient monitoring. Right now when the States receive
audit awards, grant awards, they are responsible for reporting
to the agency. However, they distribute that money to many of
the local governments and nonprofits, and the States are the
ones that are held accountable for following up on those
subrecipients. Agencies never know what those findings are, nor
do they know whether they've been corrected or not.
The very last issue is audit quality. We have a survey that
we did on the last report we issued to you. We found that the
IGs participated in about 109 reviews and found significant
problems with the audits that were being done in the area of
internal control, as well as compliance. We believe that this
indicates how major the problem is with the quality of audit
control.
This concludes my remarks, and I'd be glad to answer
questions.
Mr. Horn. Thank you.
[Note.--The GAO report entitled, ``Single Audit, Actions
Needed to Ensure That Findings are Corrected,'' may be found in
subcommittee files.]
[The prepared statement of Ms. Thompson follows:]
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Mr. Horn. We now have the second presenter, the Honorable
Mark W. Everson, Controller, Office of Management and Budget.
STATEMENT OF MARK W. EVERSON, CONTROLLER, OFFICE OF MANAGEMENT
AND BUDGET
Mr. Everson. Thank you, Mr. Chairman. I have a statement
that goes on at some length on these issues, but I will just
try to summarize it for you.
I think first I want to say obviously the issues that GAO
has raised are significant and need to be addressed.
Mr. Horn. Without objection, we'll have your complete
statement as if you read it, and go ahead on the summary.
Mr. Everson. Just picking and choosing from it, I'll try
and hit the high points.
I think the reference you made to statutory changes that
were made in 1996, we think clearly they're having a positive
effect, but more needs to be done in terms of improving the
audit quality, in terms of--as I'm sure my fellow panelists
will say--using--furthering the use of technology to get better
data. And I would just suggest that the progress has, however,
been considerable, and it's--it must be considerable, because
as you've pointed out, over $300 billion of the expenditures,
the outlays of the government, now come in the form of these
grants. In fact, it's something that I was rather startled when
I came back into government to learn that it's actually a
larger number than procurement. The money that is expended
through grants exceeds procurement.
I think we have a chart that just shows where--the pie
chart indicates just how much goes into grants. Actually in
terms of--outlays for fiscal year 2001 exceeded the money spent
on the national defense by almost $10 billion.
If you look at that, it's actually growing as well,
principally because of the increase in the Medicaid payments,
but it's actually increased from 11 percent of total outlays in
1990 to 17 percent in 2001. And we would expect that this
figure would grow as time goes on, making it all the more
important that we have appropriate financial controls and are
looking at how these moneys are expended.
Right now the--this is an area where we are dependent, as
in much of the administration's initiatives to control
erroneous payments, on the efforts of States in particular.
They are the largest grantees. In fact, if you look at just the
top five States, they receive as grantees about half of this
$320 billion. So you've got California, New York, Texas,
Illinois and Florida that constitute half of the recipients for
these moneys.
We are looking at the audit threshold right now. The audit
is required for any grantee over $300,000. We're looking at
whether we ought to increase that level. It would not in any
way, shape or form do anything to reduce the dollar coverage,
but it would reduce the burdens. Audits are obviously costly.
As was mentioned by Ms. Thompson, the management
initiatives--the President's management initiative to reduce
erroneous payments targets this very area. We need to do more,
particularly with the three departments that have been
mentioned, because if you look at the expenditure, the moneys,
and you slice it not by grantee, but you slice it by programs,
there are 665 programs that are the vehicles for this funding,
and the largest three are as mentioned. Health and Human
Services has almost $200 billion; again, Medicaid being a big
piece here. But Transportation and HUD are also quite large,
with about $40 billion at Transportation, almost 30- at HUD. So
we need to attack it both on a grantee basis, that is to say,
where the money goes, but also, as was indicated, on a
management basis of the very clear programmatic and
accountability responsibility.
We do think the audits are having a result. There are clear
cases where moneys have been recovered. An example of that
would be when Aid to Families With Dependent Children--when
that was folding down, the audits actually indicated problems
in over $20 billion--pardon me, $20 million was--of
overpayments that hadn't been provided or given back to the
government, that was secured through just this very vehicle. So
they're clearly a good thing.
I guess in closing I would also emphasize the need for
improved audit quality. Our own indications, based on the work
that's been done by IGs, are that this is spotty. It's not as
consistent as it ought to be. It seems this is the season to
question audits in general. It's, I guess, not surprising that
more needs to be done in this very critical area as well. And
I'll leave it at that.
Mr. Horn. Well, thank you.
[The prepared statement of Mr. Everson follows:]
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Mr. Horn. Our third presenter is Frederick T.
Knickerbocker, the Associate Director for Economic Programs of
the U.S. Census Bureau.
STATEMENT OF FREDERICK T. KNICKERBOCKER, ASSOCIATE DIRECTOR FOR
ECONOMIC PROGRAMS, U.S. CENSUS BUREAU
Mr. Knickerbocker. Mr. Chairman, thank you for the
opportunity to testify this morning. OMB Circular A-133
designates the Bureau of the Census as the Federal Audit
Clearinghouse. The clearinghouse provides an efficient and
effective method of processing, distributing and archiving
Single Audit reports, monitoring recipients' compliance with
the requirements to submit reports required by the act, and
capturing and analyzing information on audit results.
The clearinghouse reduces the costs of the audit process in
a number of ways. First, the central election function allows
grantees to send reports to one location instead of reporting
to each agency that provided grant funding. Next, the
clearinghouse distributes only the reports grant-making
agencies need to followup on audit findings. The clearinghouse
also facilitates the identification of those organizations that
did not submit required audits. And finally, the central
clearinghouse provides important governmentwide audit
information that was previously not available to Congress, OMB
and agency program managers.
Establishing the clearinghouse, one, reduces the reporting
burden on non-Federal entities and, two, the number of reports
that Federal agencies must process.
The clearinghouse operates under the direction of OMB with
input from the Federal agencies through a user's group and non-
Federal auditors. In fiscal year 2002, the clearinghouse
operated with a $2.6 million budget. All of these funds are
provided by the 24 Federal agencies included in the Chief
Financial Officers Council.
The clearinghouse began processing data collection forms in
December 1997. It now processes approximately 35,000
submissions each year. To date, the clearinghouse has processed
approximately 150,000 data collection forms and reporting
packages.
The clearinghouse is currently working with OMB and members
of the Audit Oversight Workgroup of the Chief Financial
Officers Council on a delinquent audit plan. In July 2001, the
clearinghouse performed a nonresponse followup test. The goal
of the test was to determine whether efforts made by the
clearinghouse would result in a significant number of
additional submissions. The test results demonstrated that a
marked improvement in the response rate is possible. The Chief
Financial Officers Council is using these results to develop a
governmentwide plan to identify delinquent single audits.
The clearinghouse maintains a governmentwide data base
covering all complete data collection form data. The data base
is accessible to Federal agency users and the public through an
Internet site maintained by the Census Bureau.
Federal agency representatives made several requests for
enhanced capabilities of the clearinghouse's Internet Data
Dissemination System. Some of these requests resulted from
efforts of the Chief Financial Officers Council to meet the
requirements of the Federal Financial Assistant Management
Improvement Act of 1999. These results resulted in several
improvements to the clearinghouse data dissemination system.
The data base for all completed submissions now approaches
150,000 records and is available through the Census Website.
The clearinghouse has also developed several electronic
options to ease the reporting burden. Larger entities have
expressed concerns over the burden of reporting on hundreds of
programs, and in response we created a processing method to
allow larger entities to submit all their data on spreadsheets
and, therefore, to the clearinghouse via diskette. Much more
importantly, however, this clearinghouse has developed an
Internet data entry system. The system allows entities to
enter, edit and submit all data electronically. The
clearinghouse started Internet reporting in early 2000. Now
approximately 60 percent of all submissions are reported
online.
Since the clearinghouse is the single submission point for
nearly all audit reporting packages, Federal agencies generally
no longer receive copies of the audit reports directly from
auditees. The clearinghouse, however, currently maintains an
archive of the current-year audit reports and those for the 4
prior fiscal years. Requests for copies of reporting packages
are received daily. Those from Federal awarding agencies are
processed immediately. Public requests for copies of audits
requires special attention due to the possible presence of
sensitive data such as the names of individuals and Social
Security numbers.
For requests from non-Federal entities, the clearinghouse
staff locates and copies the audits, and our Freedom of
Information Act Office forwards them to the relevant agency for
review and distribution. To assure outside consultation on this
whole operation, a Single Audit Users Group was formed with
representatives from the Federal grantmaking agencies, OMB,
GAO, the clearinghouse, the public sector and private
accounting firms, and this group has been meeting periodically
since 1997.
That concludes my testimony. I'd be happy to answer any
questions.
Mr. Horn. Thank you.
[The prepared statement of Mr. Knickerbocker follows:]
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Mr. Horn. We have now the ranking member here, and she,
too, will have to leave when I leave at 11, because she's in
the financial business where they're always meeting.
Ms. Schakowsky. Well, we're in a markup.
Mr. Horn. Ms. Schakowsky, the gentlewoman from Illinois.
Ms. Schakowsky. I thank our distinguished panel, and I
thank you, Mr. Chairman, for your leadership on financial
management issues and for holding this hearing on the Single
Audit Act.
The Single Audit Act is an important piece of legislation,
because it both improves financial accountability and reduces
the burden the Federal Government places on nonprofit agencies
and local governments that are receiving Federal funds.
These audits provide the basis for public assurance that
grant funds are being spent properly and at the same time
allows these agencies to meet all audit requirements with a
single annual audit.
There are a wide variety of agencies in the city of
Chicago, part of which I represent, which come under the Single
Audit Act from the Archdiocese of Chicago to the Chicago
Antihunger Federation, to the Lincoln Park Zoo. I'm pleased
that we have reduced the burden on these organizations and that
we can account for the Federal funds spent.
However, I would like to challenge the auditors to look at
these audits not simply as a review of the past, but an
opportunity to help make these programs more effective.
I would like us to move beyond the concerns about
recordkeeping and work toward a system that helps these
agencies become more efficient in the delivery of services. We
care about the Lighthouse Group or the Jewish Children's Bureau
not because they're good recordkeepers, but because of the good
work that they do.
I would like to see the auditors assist these agencies in
streamlining their financial systems so that they can spend
more time and more dollars on services and less on financial
accounts. If we can use these audits to improve service
delivery, we will have accomplished a very important goal.
Again, I thank you, Mr. Chairman, for holding this hearing,
and the witnesses for your testimony.
Mr. Horn. Thank you.
And our next presenter is Russell W. Hinton, Chair of the
Single Audit Committee of the National Association of State
Auditors, Controllers and Treasurers. Mr. Hinton.
STATEMENT OF RUSSELL W. HINTON, CHAIR, SINGLE AUDIT COMMITTEE,
NATIONAL ASSOCIATION OF STATE AUDITORS, CONTROLLERS AND
TREASURERS
Mr. Hinton. Thank you, Mr. Chairman. I appreciate the
opportunity to testify today on behalf of the National State
Auditors Association regarding the Single Audit Act amendments
of 1996. My testimony represents the combined views of the NSAA
membership and does not necessarily represent the views of
individual States and their implementation of the Single Audit
Act.
A recurring theme throughout the amendment process was for
the implementation of the single audit process to be dynamic,
that processes and procedures reflect changing conditions. We
feel that the adoption of this concept will strengthen
implementation of the single audit process significantly.
From a State perspective, critical to an ongoing single
audit process is maintenance of OMB Circular A-133. Four areas
that we consider critical that need to be addressed
periodically would include updating of the OMB A-133 compliance
supplement, review of the single audit threshold, authorization
for review of pilot projects and continual update of the data
collection form.
With regard to the OMB compliance supplement, the State
audit community is very pleased with the efforts of OMB to
update that document annually. It provides a wealth of
information for those of us who are charged with the
responsibility of auditing Federal programs.
With regard to the single audit threshold, the amendments
would require OMB to review the threshold triggering the single
audit biannually, and it is our current understanding that a
proposal from OMB will be forthcoming, calling for an increase
in the threshold from 300,000 to 500,000. NSAA will be
supportive of such a proposal.
A few States opposing an increase in a threshold cite
concerns relating to the monitoring of subrecipients. To the
extent that additional subrecipients will no longer be covered
under the Single Audit Act amendments of 1996, a particular
State's monitoring efforts and audit costs may likely increase.
There are--in conjunction with an increase in the threshold to
$500,000, the NSAA has agreed to participate in a working group
proposed by OMB to develop methodologies to effectively and
efficiently monitor subrecipients.
With regard to authorization of pilot projects, OMB may
authorize pilot projects after consultation with appropriate
Senate and House committees to test alternative methods of
achieving the purposes of the amendments. It was envisioned
that numerous pilot projects would be ongoing and would serve
as a catalyst for future amendments to the Single Audit Act and
A-133. Today the NSAA notes that the pilot project provision
has not been fully utilized to explore alternatives. The NSAA
remains supportive of the pilot project provision of the Single
Audit Act amendments of 1996.
Several States indicate the single audit objectives and
corresponding audit procedures do not adequately measure
combined Federal-State-local program results, and several
States believe it is time to transition the focus of single
audits from compliance audits to alternative engagement types
through the pilot project process; i.e., performance audits or
total program engagements. The NSAA, therefore, encourages the
OMB and other Federal grantor agencies to initiate or solicit
proposals for worthy pilot projects and to give appropriate
considerations to cost/benefit and timing issues.
With regard to single audit quality, the creation of sound
single audit legislation does not--obviously does not guarantee
a successful implementation. We believe that it's dependent
upon a cooperate effort between both the Federal Government
granting agencies and auditors.
With regard to management decisions, we are sometimes
frustrated in the State audit community that while Federal
awarding agencies have shown improvements in the timeliness in
which they address recipient audit findings, several States
continue to be concerned that Federal awarding agencies are not
operating at the optimum level with regards to the issuance of
timely management decisions.
We applaud the creation and use of the Federal Automated
Clearinghouse Data base. It's been an invaluable tool in
monitoring overall audit quality from a State perspective. It
provides a wealth of information to assist us in monitoring our
responsibilities at the State level.
With regard to quality control reviews, NSAA considers
quality control reviews to be one of the most effective means
of ensuring accountability over the quality of audits conducted
by non-Federal auditors. We would like to see an increase in
this in conjunction with increased auditing efforts at the
State level with regard to the quality of certain audits of
smaller organizations. We note a large disparity in the quality
of work being conducted at that level and feel that particular
training and other efforts should be directed at auditees with
regard to auditor procurement, because based on some of the
research that we have done, we need a better grade of auditor
at certain levels.
We would once again emphasize--I think one of the success
stories of the 1996 amendment has been an increased cooperation
on the part of the Federal, State and local government audit
community, and we would certainly applaud those efforts going
forward. Thank you.
Mr. Horn. Thank you.
[The prepared statement of Mr. Hinton follows:]
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Mr. Horn. And we now go to the Honorable Jack Martin, Chief
Financial Officer for the Department of Education. Mr. Martin.
STATEMENT OF JACK MARTIN, CHIEF FINANCIAL OFFICER, DEPARTMENT
OF EDUCATION
Mr. Martin. Mr. Chairman and members of the subcommittee,
good morning. It is my pleasure to be here today on behalf of
the Department of Education concerning the Department's actions
and progress under the Single Audit Act.
This past January, President Bush signed into law H.R. 1,
the No Child Left Behind Act, closing a successful year of
bipartisan cooperation in Congress and opening a new era in
American education. To meet the challenges of this new law, the
Secretary of Education, Rod Paige, implemented earlier this
year a long-term management improvement plan, the Blueprint for
Management Excellence. The blueprint sets a new direction
within the Department that demands organizational excellence in
programs, performance and management. The Single Audit Act
complements this direction.
My role as Chief Financial Officer is to advise the
Secretary on matters regarding financial management, including
audit resolution. This is my first opportunity to testify since
being sworn in in February. Today my remarks as the audit
followup official for the Department will be directed at key
audit resolution improvements and some issues that make our
process unique.
Earlier this month GAO issued its draft report titled
Single Audit: Actions Needed to Ensure That Findings Are
Corrected. We're pleased to note from the report that the
Department is doing a good job in carrying out its
responsibilities under the Single Audit Act. We know, of
course, there's always room for improvement.
We support GAO's recommendations that agency management
should be kept apprised of single audit findings and grantee
corrective actions. Our Department issues hundreds of decisions
a year on single audit findings, addressing program compliance
requirements. These decisions are made at the Assistant
Secretary's level, and these officials or their designees are
aware of and are involved in addressing compliance issues
targeting their programs.
To address the findings, we will take another look at our
audit resolution process to identify areas of internal control
that can be further strengthened, including reviewing files to
ensure proper documentation and resolution of findings.
At the Department we have long recognized the importance of
single audits as a critical measure of the effectiveness of
education programs and student performance at the State and
local level. To get the most out of the single audit process,
we adopted what we referred to as a Cooperative Audit
Resolution and Oversight Initiative, or CAROI. GAO noted in
their report that CAROI is a practical approach to address
complex and recurring single audit findings. We also are proud
of the fact that the Association of Government Accountants has
designated CAROI as a best practice. Through CAROI, the
Department brings all key partners, Federal and State, to the
table to address audit findings.
Before CAROI the process was time-consuming, bred ill will
between the Department and the grantees, and ran up high costs
through litigation, often resulting in modest monetary
recoveries. With CAROI, the Department works hand in hand with
the States to resolve problems identified in audit reports.
CAROI is an evolving process at the Department of
Education. One of our objectives is to improve timeliness.
Currently it may take a year or more to get a completed
agreement among all the participant at table. We believe we can
do better. Our most successful CAROI effort to date has been
the Commonwealth of Pennsylvania. Over 120 findings, many
involving complex issues and high dollar amounts, were resolved
in a 6-month period. This extraordinary accomplishment
demonstrates how State, Federal cooperation and teamwork can
work when the lines of communication are fully open. The true
measure of this program is its ability to address problems
identified in audit reports once and for all. With this as our
criteria, the Pennsylvania CAROI project was a resounding
success. Subsequent single audits from the Commonwealth contain
no repeat findings.
Another enhancement I'd like to mention is our Triage
program. At the Department, Triage refers to the process by
which we assess the seriousness of audit findings to determine
the amount of attention needed for resolution. Its purpose is
to promote the most efficient use of audits to assist
management in achieving program goals and discharging our
fiduciary responsibilities, while at the same time helping us
to use our internal resources more effectively.
We're also in the process of updating our Post Audit User
Guide. Our focus has been on strengthening procedures to ensure
that the Department has an effective system for audit
resolution, close-out, record documentation, and maintenance
and followup. It is being developed as an Intranet document
with links to key information. In addition to the user guide,
we're also in the process of revising the Department's
Discretionary Grant Handbook, which includes guidance on the
value and use of single audits.
We're also continuing to improve our ability to track and
monitor audit resolution efforts. This year we began an effort
to build a single data base system to track, monitor and report
on the postaudit status of single audits, GAO audits and ED-OIG
audits. We anticipate the new combined system to be up and
running earlier next year. Our current system has been
designated a best practice by the Association of Government
Accountants.
The Department of Education has some requirements unique in
the Federal Government. One of these requirements is to
establish a prima facie case for the recovery of funds when
resolving our GEPA audit reports. This means that we must
include a statement of the law and the facts that, unless
rebutted, is sufficient to sustain the conclusion drawn in our
management decision letter. In addition, our decision must
include an analysis of the value of program services actually
provided in determining harm to the Federal interest. This
provision raises the bar for what must be included in
management decisions in a way that requires the Department to
take considerably more time together and analyze audit
information and review it for legal sufficiency.
In closing, Mr. Chairman, our goal is to ensure that
recipients correct the weaknesses identified in the single
audit reports, and that we take the necessary steps to ensure
the implementation of single audit guidance as required by OMB
Circular A-133. I appreciate the opportunity to come before
your subcommittee and share our Department's commitment to
effectively meet our single audit responsibilities. I'll be
happy to answer any questions you or any member of the
subcommittee may have. Thank you very much.
Mr. Horn. Thank you.
[The prepared statement of Mr. Martin follows:]
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Mr. Horn. Now we have Thomas A. Carter, the Assistant
Inspector General for Audit Services of the Department of
Education. Mr. Carter.
STATEMENT OF THOMAS A. CARTER, ASSISTANT INSPECTOR GENERAL FOR
AUDIT SERVICES, DEPARTMENT OF EDUCATION
Mr. Carter. Good morning, Mr. Chairman and members of the
subcommittee. I appreciate the opportunity to discuss how the
Offices of Inspector General meet their responsibilities to
assure the quality of single audits under the Single Audit Act.
The IG Act mandates that the Inspector General take appropriate
steps to assure that any work performed by non-Federal auditors
complies with the standards for audits established by the
Comptroller General. The Offices of Inspector General devote
varying resources to assuring audit quality based on their
resources and the needs of their agency.
OIGs apply four basic efforts to assure audit quality. Some
OIGs use all four, while others use fewer. The first is
performing desk reviews. All single audits undergo an initial
desk review by the Federal audit clearinghouse to determine if
the submitted reporting package is complete. Some OIGs or
another office within their agency perform a second desk review
when the report arrives at their agency.
A second effort is conducting quality control reviews, or
QCRs. The OIGs conduct QCRs of the auditor's working papers on
a sample basis. The objectives are to first ensure that the
audit was conducted in accordance with applicable standards and
meets the single audit requirements; second, to identify any
followup audit work needed; and third, to identify issues that
may require management attention. QCRs are performed using the
PCIE's uniform quality control review guide.
The third effort for OIGs is preparing audit guidance for
the auditors. The annual OMB Circular A-133 Compliance
Supplement contains specific audit guidance relating to over
150 individual Federal programs. The revision of the compliance
supplement usually is a collaborative effort between OMB, the
program officials, legal counsel, the Chief Financial Officer's
staff, and the OIG. The degree of OIG involvement in the
revision process varies among agencies. At the ED-OIG we play a
major role providing a compliance supplement policy official
who coordinates and works with other ED officials on revisions,
performs a final review, and submits the completed input to
OMB.
The final quality-related effort of OIGs is to provide
training and technical assistance to auditors and program
officials on single audits. Again, the level of effort given to
this activity varies among the OIGs. We don't have specific
information on what the other IGs have done in this area, but I
have included some examples of ED-OIG activities in my complete
statement to illustrate the form and extent this can take.
While OIGs generally fulfill their responsibilities on
single audits independently, there is a long history of
coordination and collaboration among members of the PCIE on
single audits. Through this coordination, we can leverage our
resources and take a more unified approach to resolving single
audit issues. ED-OIG recently initiated steps to revive a
committee of PCIE members' representatives that would provide a
regular forum for continuing dialog on single audit matters. We
met earlier this month and plan a followup meeting later this
summer.
How good is the quality of single audits? We don't really
have a complete answer to that question. We got a partial
answer in the spring of 2001 when the PCIE audit committee
conducted a survey of single audit QCRs performed over a 4-year
period. The survey reported that OIGs conducted 459 QCRs, of
which 75 percent were judged to be acceptable, 20 percent were
technically deficient, and 5 percent were substandard. We
really do not know how good the quality of the audits is
because these results may not be representative of the quality
of all single audits.
The selections of QCRs by us and other OIGs were based on
judgmental factors rather than a random basis, and therefore
the results are not projectable. To draw a statistically
projectable sample of sufficient size and scope that would
afford a meaningful assessment of single audit quality across
the board would require the OIG community to develop and
execute a sample of single audits for which all OIGs have
oversight responsibilities. We have taken a first step toward
achieving that projectable sample. At our June meeting the OIG
community agreed to begin exploring ways to conduct a
statistical sample of QCRs.
In summary, the Offices of Inspector General have a key
role in ensuring the quality of single audits, and they are
performing a number of efforts to improve the quality. We
currently do not have a valid measure of the quality of single
audits, and we cannot properly measure how effective our
efforts are. This is why the current effort to develop a
statistically valid sample needs to be successful.
Mr. Chairman and members of the subcommittee, I will be
happy to answer any questions you may have for me.
Mr. Horn. Thank you, Mr. Carter.
[The prepared statement of Mr. Carter follows:]
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Mr. Horn. And our last presenter is Elizabeth Hanson,
Director of the Departmental Real Estate Assessment Center of
the Department of Housing and Urban Development.
STATEMENT OF ELIZABETH A. HANSON, DIRECTOR, DEPARTMENTAL REAL
ESTATE ASSESSMENT CENTER, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
Ms. Hanson. Thank you, Mr. Chairman and members of the
subcommittee.
Financial and compliance audits, including audits of State
and local governments and nonprofit entities under the Single
Audit Act, are an essential element of the U.S. Department of
Housing and Urban Development's management control and
oversight of its housing and community development programs.
The Office of Public and Indian Housing's Real Estate
Assessment Center is responsible for electronically collecting
and assessing audit reports from housing providers receiving
financial assistance from either the Office of Public and
Indian Housing or the Office of Multifamily Housing. For the
approximately 3,200 public housing agencies and the 8,700
nonprofit owners of multifamily projects, this means an audit
in accordance with the Single Audit Act and OMB Circular No. A-
133. The Real Estate Assessment Center uses the financial
submissions to assess the financial condition and regulatory
compliance of the property, or the PHA, and assigns the
property or PHA to one of three risk categories depending upon
whether the property is a good, marginal or troubled performer.
The financial submissions and assessment results are
referred to program staff in HUD's Office of Public and Indian
Housing and the Office of Multifamily Housing for use in risk-
based targeting of technical assistance, onsite monitoring and
enforcement activities to improve program compliance and
performance.
The Real Estate Assessment Center has set up a division to
assure the quality of the audits. The Quality Assurance
Subsystem consists of a staff of auditors whose primary purpose
is to conduct quality assurance reviews, together with
certified public accounting firms that perform financial
statement audits of HUD housing program participants.
Based on several factors, we select high-risk firms for
quality assurance reviews annually. The selection criteria
includes outstanding referrals from both financial analysts at
the Real Estate Assessment Center and HUD program offices,
total assets audited by the firm among all HUD-related
engagements, and total revenues audited by the firm for HUD-
related engagements. Also, if a firm audited 10 or more
entities during the previous fiscal year or identified no audit
findings, that is considered a factor for selection.
When substandard work is identified, the QASS team
recommends administrative sanctions which include one or more
of the following: Referral to one or more of the State boards
of accountancy in the States where the CPA firm practices,
referral to HUD's Departmental Enforcement Center for potential
debarment proceedings, and referral to the American Institute
of Certified Professional Accountants.
There are approximately 340 CPA firms auditing about 2,150
PHAs, and the top 10 percent of those firms audit about 68
percent of this population. Many of these firms are either sole
practitioners or firms with three or fewer CPAs on staff. The
average number of audits performed by the top 10 percent of
firms is 44 audits per year, with a range between 35 and 114
audits. Seven sole practitioners do more than 50 audits
annually, with one CPA doing 98 audits by himself. A firm with
only 3 CPAs audited 8 of the 33 largest PHAs in the country.
Analysis of referrals that QASS has received, as well as
the quality assurance reviews already completed indicate that
several high-volume practitioners do not have the resources to
perform PHA audit engagements in accordance with the
professional auditing standards or within timeframes required
by the Department. A combination of high volume and limited
staff resources means that audit quality suffers. With fees
being directly related to the time spent on an audit
engagement, fewer staff hours not only result in a lower fee,
but also a lower quality of work.
Of the 25 PHA auditors reviewed during the 12 months ending
February 2002, QAR results indicate that 20 firms were not in
compliance with professional auditing standards. We have made
18 referrals for administrative sanctions, and we have an
additional 10 referrals pending. The majority of these are to
the State boards of accountancy where the CPAs practice.
However, there are four debarment actions pending at the
Departmental Enforcement Center.
For multifamily housing projects, regardless of whether it
is a profit-motivated owner or a nonprofit, we've determined
that there are approximately 2,260 CPA firms providing audit
services to the populations of owners required to submit audits
to HUD. For this program, the top 10 percent of firms audit
about 55 percent of the population.
In fiscal year 2001, we reviewed 87 firms that performed
multifamily audits, both A-133 and program-type audits, though
primarily profit-motivated owners. QASS identified only one
firm with severe performance problems. In general the firms
that perform the most multifamily audits are regional, large
local or national firms with adequate staffing for their
workload.
Other HUD grant programs such as those administered by the
Office of Community Planning and Development are also relying
on audits under the Single Audit Act as an essential component
of their program management control and oversight. In this
area, HUD's program field staff are responsible for obtaining
and acting on single audits to ascertain the financial
condition and compliance of the program participants. However,
recent review by the U.S. General Accounting Office cited that
these HUD program areas do not have a central system to assure
that single audits are properly received and acted upon. HUD
has plans in place to better assure that all required single
audits are properly received and acted upon in all HUD program
areas.
Thank you.
Mr. Horn. We thank you.
[The prepared statement of Ms. Hanson follows:]
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Mr. Horn. And now we'll start the Q and A, and one question
I want to all of you to answer, and that has been mentioned,
the Office of Management and Budget is working toward
increasing the single audit threshold from $300,000 to
$500,000.
Ms. Hanson, what are your views on the increase?
Ms. Hanson. We have looked at it from the perspective of
the multifamily and public housing programs, and it's not going
to significantly impact our oversight of those public housing
agencies or the multifamily property owners. In terms of the
dollar amounts covered by those entities, it's not significant.
And in addition, we continue to receive the unaudited financial
submissions from those property owners and public housing
agencies, so we still have the ability to look at the financial
information.
Mr. Horn. Mr. Carter.
Mr. Carter. We haven't taken an official look at it yet,
but from discussions with my non-Federal staff, I believe our
position would be that it would not be a bad idea to increase
the threshold.
Mr. Horn. Mr. Martin.
Mr. Martin. We haven't officially examined the $500,000
threshold, but I think our position would be to support it.
Mr. Horn. Mr. Hinton.
Mr. Hinton. The National State Auditors Association would
support such a proposal. As I stated in my testimony, some of
the concerns are among the States for--whereby the State has
linked their monitoring efforts to the threshold, and there
will have to be some review there, but NSAA would be in support
of it.
Mr. Horn. Mr. Knickerbocker.
Mr. Knickerbocker. Increasing the threshold will presumably
reduce the number of submissions, but from the clearinghouse
standpoint, we stand ready to process any number of
submissions.
Mr. Horn. Mr. Knickerbocker.
Mr. Knickerbocker. Oh, yes, sir. Again, as I said,
presumably increasing the threshold will reduce the number of
submissions, but from the clearinghouse standpoint, we stand
ready to process any number of submissions.
Mr. Horn. Mr. Everson.
Mr. Everson. I'd just point out here, our understanding is
there are about 34,000 entities that get audited. This would
knock out 6,000 of those entities. That's only 18 percent, but
it would--the dollar coverage would be less than 1 percent that
you're losing by taking that step. So we think it lightens the
burden, reduces the burden on the public with no change in the
risk quotient from the overall Federal Government point of
view.
Mr. Horn. Ms. Thompson.
Ms. Thompson. On the surface I think GAO would be in
support of that, but I would say that there needs to be a
balancing to look at the subrecipients, because the Federal
agencies are not getting those reports from the subrecipients.
They are going directly to the State, and we don't know what
the effect would be on those, and I think there needs to be an
analysis on that.
Mr. Horn. I thank you. We're going to be in recess until 11
a.m., and Mr. Miller will assume the Chair as chairman. And so
I thank you very much for coming.
Mrs. Maloney. May I ask one question?
Mr. Horn. Well, can you wait for Mr. Miller, because I have
to be in Transportation. Otherwise I'd love to do it.
[Recess.]
Mr. Miller [presiding]. The hearing will continue. We will
proceed with questions and ask Mrs. Maloney to go.
Mrs. Maloney. I am delighted to join with my good friend
Dan Miller and place my regrets that he has decided not to run
for reelection. He has been an outstanding Member of this body
and I will miss him. I wish he would reconsider.
I also welcome all the witnesses and just briefly state
that the Single Audit Act was created in 1984, amended in 1996,
in order to ensure that money awarded by the Federal Government
is well spent by the private organizations that get it.
Entities that receive over $300,000 of the taxpayers' money
must arrange to have a single audit which agencies, with the
help of the Federal Audit Clearinghouse, are supposed to review
in order to spot misuse of government funds.
Many agencies also consult the audits before awarding
money, to check how recipients have handled previous awards of
Federal money. Those agencies who do not should begin this
commonsense practice.
As someone who has tried to serve and work with Mr. Miller
and others to look at ways to better manage taxpayers' money, I
am disturbed by some of the failings that have been reported by
the single audit system. For example, the Department of Health
and Human Services--and I understand they are not with us
today--has twice been cited in GAO reports as not having any
comprehensive way to deal with the Single Audit Reports that
come into its agencies. In an April 23rd report and a June 11th
report that I requested, with Wisconsin Representatives Barrett
and Kleczka, the GAO reported that HHS did not know the extent
to which the single audits they had received revealed the
misuse of funds because they had no comprehensive system of
analyzing the reports.
The Department of Health and Human Services serves the
neediest among us. It is our job to make sure that money
intended to provide food, schooling, or job training is not
wasted or stolen by incompetent or criminal organizations. And
without adequate oversight from HHS, we have no way to tell how
much of that money is truly going to the ones that most need
our help.
I know we have other Federal agencies represented here
today, and I look forward to reading your testimonies. I did
hear some of it.
But as I was talking while we were waiting with Mark
Everson from the OMB, the Comptroller there, he indicated, I
thought, something very wise to me: that this really has to be
a team effort with the States and the localities, and that we
send this money oftentimes in block grants or direct grants to
the States and localities, and that they should be playing
their part in making sure that these funds are well spent.
I used to be a member of the City Council of New York for
10 years, and have many friends on that body. And if any of you
have any ideas of how we could--I'll just use my city, because
I know New York has many needy people and has many--a great
deal of funding from HHS and other housing and other areas--of
ways that we could get the city to work with us to help us
improve what we're doing.
I can tell you, when I did come to the Federal Government
from the city of New York, I was amazed at how well run the
Federal Government is. I think it is extremely well run
compared to the city of New York, which I think is well run,
but your controls and oversight were superior to that which we
had worked to put in place in the city.
[The prepared statement of Hon. Carolyn B. Maloney
follows:]
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Mrs. Maloney. I have two questions:
No. 1: How can we get the localities to take some of this
burden off of us, and responsibility, to make sure that the
moneys are spent well?
And the second is really the result of the GAO report that
said that often they will, in the single audit, they will
analyze and see something wrong; yet then there is no followup
to make sure that it is corrected. So why even bother to have
an audit if you are not going to then take the next step, which
is to correct whatever it is that is a mismanagement, which may
be just something as innocent as not really being a
sophisticated manager in some areas of the country or even in
the city of New York? Why bother with a single audit if we
don't correct the problems that come out of it?
I would like to open those two questions up. If anyone has
an idea of how you respond to the point that I raised that
oftentimes they come up with ideas that are of mismanagement,
yet no one follows through, how do we get the Federal
Government to follow through? But, on the other hand, it should
not just be the Federal Government's responsibility, it should
be part of the city's and the State's to work in partnership
with us. How do we shift some of this responsibility in a way
that is accountable to the local areas so that we can make sure
that the dollars get to the people who need it, and, very
importantly, are well spent in the way that we intend when we
vote in Congress to help the poor that it truly does?
So I just open it up for comments from anybody.
Thank you, Mr. Chairman for yielding to me. Always a
gracious gentleman. Thank you.
Mr. Everson. Maybe I could try to frame it from the center
at OMB, if you will, and from the President's Management
Council point of view, if I could.
First, thank you very much for your offer on New York City,
and we will take a look at that and come back to you.
But the President's management agenda has, as one of his
five core areas, improved financial performance. Central to
that is the reduction of erroneous payments. This is part and
parcel of that effort, because what you have here is you have
an attack on this through two levels. One is very much through
the departments that run these programs, and the word
``accountability'' that was used earlier is quite--quite
central to this--this whole issue.
We are working with the departments, including those
represented here and others, to make sure they're following up
on this whole area. They're doing studies and indicating to us
what the erroneous payment rate is, which is--which is clearly
one of the things you determine through these audits. And I
think we are going to make some progress.
It is a complicated issue, though, and it is complicated
because of the other point that you raised, which is that they
don't directly control these moneys. The moneys are given to
others who then run these programs. And frequently, I have to
be honest here, the imposition of controls is resisted, even
within this body, because there'll be pushback from States or
from counties as to the imposition, say, of penalties. An
example of that being just now in the farm bill and changes we
wanted to make in food stamp areas, just the penalty phase; if
people spent too much money and did not have the adequate
controls, there's oftentimes a lot of pushback, because if
you're going to get a penalty, obviously it costs the State
money.
It is a very complicated dynamic, and you need to work at
both the department level but also at the State level, and we
need your help there because sometimes they don't want to
cooperate.
Mrs. Maloney. If I could followup on your comments, that
one way to address that is to come forward with how we want
these controls federally. And instead of imposing the penalty,
say if you want this money within a 5-year period or a 10-year
period, you implement this type of management control. You
know, I think sometimes, particularly in serving the poor when
the need is so much, they are just overwhelmed; people are
overwhelmed, and they can't really spend the time to think of
how they could better control it.
So maybe we in the Federal Government that has more
experience in controls and oversight could come up with some
ideas that we could just suggest, maybe instead of a penalty,
we could put out an incentive; say you correct this in X, Y, Z
ways, and then we will give you more money.
Now, very briefly, on the State and city of New York, by
far the Federal budget goes to the city of New York, not the
State, because the city of New York serves the--it's where the
poor live. And it's the urban center of where the population
really lives. And I was always surprised on the State to see
how much more money was really in the city on contracts,
building, Medicaid, Medicare, Social Security than upstate. You
always think the State is bigger. But as I said, if you wanted
some model cases or some hearings or some, you know, just some
thought on how you could do this, I could certainly work with
you with the city of New York. All 52 members are still friends
of mine because I served with them.
Mr. Everson. I would like to do that.
Mrs. Maloney. Maybe that would be a better way of getting
that done, as opposed to saying we are going to give you a
penalty, when most cities and States have a huge budget gap.
The city of New York has a $5 to $6 billion budget gap. If you
talk about a penalty, they are going to be upset because they
need the money. But if it came in in the beginning, not in an
onerous way, but we will give you 5 years to correct your
erroneous payment problem by X, Y, Z, they would welcome the
leadership of how to respond, because no one wants their
limited dollars being spent inappropriately.
Thank you.
Mr. Martin. I believe that many cities continue to fund
some recipients that are financial basket cases. And I believe
that if they improve followup of these subrecipients, and
consider the audit findings in future awards, that would reduce
the findings considered in the single audit process.
Ms. Thompson. I'm from GAO, Mr. Congressman; nice to have
you here; nice to be here today. One of the things that I
mentioned in my remarks before you came in was that I felt
there was a real need for the States to report on the
subrecipients, because the Federal agencies are not getting the
information on the audit findings of these subrecipients. I'm a
firm believer that by reporting, you increase accountability.
But more than that, you could do analysis. The Federal agencies
then can look across the subrecipients and see where the
problems are.
For instance, we've seen a lot of audit findings in
eligibility, and you take that down to an individual program
then, and if you see that prevalent across many States, you
need to then look at what is the reason that they're finding
audit problems in eligibility? It allows that kind of analysis.
Right now, the States are not reporting up on who the
subrecipients are, nor are they reporting up on what kind of
audit findings are being identified out there by the audits and
what kind of followup actions are being taken to correct those
problems. Even though those audits are in the clearinghouse
data base, that information is not going out to the Federal
agencies.
And I think if we had, again as you mentioned, a
partnership among everybody within the State up to the State
level, and then the States with the agency level, we could
increase our accountability but, more importantly, give them
the information they need to do this kind of analysis.
Mrs. Maloney. Thank you.
Mr. Miller. Thank you. Let me ask some questions of Mr.
Everson, and I know he has to leave early. Three questions I
will ask you, and then you can cover them all at one time.
The GAO report issued today raises questions about the
adequacy of agency efforts to ensure that recipients of Federal
awards are correcting weaknesses identified in the single audit
reports. What is the OMB's role in ensuring that the weaknesses
are corrected?
A recent GAO survey indicated that agency quality control
reviews have found problems with the quality of some single
audits. The question is, how pervasive is this problem?
The third question is, what is OMB doing to ensure that all
required single audits are being performed?
Mr. Everson. Taking the first one, as I indicated before,
the President has articulated improving financial management as
one of the five governmentwide efforts that we are undertaking
as part of the President's management agenda. This is a very
central element of it, reducing erroneous payments, so we take
very seriously the work that GAO has done here in looking at
the efforts, really, of the departments which control the
largest pieces of this $300-some-odd billion of grants that are
out there.
We have concerted efforts, working with the departments, to
increase our monitoring of what they're doing in this area, and
as you may know, we are evaluating their progress quarterly. In
fact, we will be updating our management--executive branch
management scorecard on where each agency stands, their efforts
in this area; and, for instance, be giving my colleague here,
Jack, a grade on how the Education Department is doing on
improving financial management.
That will be published and be available to everybody on
July 15th when we do the midsession reviews. So there is a
great deal of accountability and a great deal of focus on this
whole effort. And it will take into account things like GAO
reports on this area. So that's the first question. I think it
is receiving the attention it needs and will be highlighted.
The quality of the audits. I think that as several people
touched on, I don't think we really know as well as we should
just whether the audits themselves are of the standard across
the board that we would want, the points that were made about
the involvement of the inspectors general and also, I would
think, the CFOs that get a clear view of this, they're central.
We need to do more in terms of the sampling of the audits, more
peer reviews.
I think the PCIE, which is the group of IGs and the audit
committee that was referenced, they're working on this. We are
working on this with them. But I think we do need to do more.
And as I indicated before, this is a tough time to be in the
audit business. They're in for a lot of criticism in the work
that's being done in the private sector. We need to make sure
that we have very high standards here. So I think more needs to
be done and we will do that.
I am the acting chair of the PCIE, and I will make sure
that I reiterate that as we work on that on the IG side.
Help me again on the third question?
Mr. Miller. What are you doing to ensure that all required
single audits are being performed?
Mr. Everson. I think that is, again, an active area of
collaboration amongst the bodies that we have in place. And
there is a grants subcommittee that works within the CFO
Council structure and works directly--we have a lot of
coordination on this--with GAO and with the departments through
the CFO Council. But I think that, as was mentioned earlier,
that--I think you used the word ``honor system.'' I don't think
we have quite figured out a foolproof way here to make sure
that everybody who should provide an audit is so doing. That
remains to be seen how we would make that air-tight.
Again, though, I think that we are picking up, we are
sweeping in the big-dollar items, as I indicated before. The
exposure here may be on some of the smaller grantees, is where
I think there is probably greater risk.
Mr. Miller. Let me ask about the Federal Financial
Management Improvement Act. Could you comment on the OMB's
views of the effectiveness of the Federal Financial Management
Improvement Act and what action is being taken to address the
continuing poor condition of the financial systems across the
government?
Mr. Everson. I think that the act has been very important
in trying to direct agencies to get to systems that are
compliant with Federal standards, both as to their own
individual needs, but moreover to get to a common set of
transaction processes and standards such that you could
actually use this information on a central basis.
As you know, right now we don't have audited financial
statements for the U.S. Government. GAO can't opine on the
financial statements of the U.S. Government. Part of this is
systems driven; that we can't even collect and provide
information, adequate information on all the intergovernmental
transactions. You can't get there until you have good systems
that produce the right information in the right account
structure.
Nevertheless, having said that, as we move forward to
improved systems across the government, and invest to do that--
and there is a great deal of modernization that is going
forward right now that's very good. There is a problem, I would
suggest to you, with the act as you look at all the reporting
that takes place under FFMIA, FMFIA, the CFO Act and other
areas. There is almost a competing hierarchy of reporting under
these various acts. And we need to be, I think, taking a look
at this.
I have talked to the Comptroller General about it, getting
a better hierarchy of reporting. Because what happens quite
frankly, sir, is that you end up opining as to compliance with
FFMIA, and that gives you a series of issues to address, and
then you've got material weaknesses and FMFIA problems, and I'm
not sure the agencies know where to turn to--which problem to
fix first. We need to get a rational system that says we have
material weaknesses that the auditors have determined which
would sweep in these FMFIA problems, and work on those, if you
will. It is a little too complicated out there right now.
Mr. Miller. One more question of Mr. Everson before you
leave. It is related to H.R. 4685, the Accountability of Tax
Dollars Act of 2002. What is OMB's views of H.R. 4685 and does
it support the bill?
Mr. Everson. You will have to tell me a little bit more
about it.
Mr. Miller. It increases the number of agencies that are
going to be required to have audits.
Mr. Everson. OK, great. Yes. Yes. We are for this because
it brings down--this lowers the threshold and sweeps in some of
the smaller agencies. We think that is a good idea. They end up
with their financial statements.
The piece that I think we have some reservations about is
really just what I talked about a minute. The FFMIA components
of that; because it's not totally clear to me in a small agency
that you should mandate that same adherence as to the technical
requirements on systems, because those really have a benefit to
us overall if you want to roll up the information into the
governmentwide statements. It's not clear that you want--
they've got a system that the auditors would say is adequate
for their purposes. I'm not sure whether, in a $30 million
agency or program, you would want to mandate that they go
through the investment cost of having a system that is actually
totally in agreement with what we need to roll up the
governmentwide statements.
That's the only reservation we have. But we are strongly in
support of having you test functions attached to those
agencies.
Mr. Miller. What is OMB's views on the improper payment
bill?
Mr. Everson. If you could tell me--there are a couple of
different pieces that are moving on improper payments. This is
the--you're talking about--the bill that's just moving forward
now, which would really codify the reporting on programs by
agencies to OMB? Yes, that would simply I think support what we
are trying to do, and provide tighter deadlines, if you will,
for us I think. So I think it would help us. Not any different
to what Jack and his colleagues are trying to do for us. But
having it in the law, sure.
Mr. Miller. Mrs. Maloney.
Mrs. Maloney. I have no further questions.
Mr. Miller. Mr. Everson, I know you have an appointment.
This is for Sally Thompson. Two questions: What needs to be
done to ensure compliance with the Single Audit Act? And how
effective are the provisions of the Single Audit Act? Is the
act working?
Ms. Thompson. I think it's an excellent act. It provides
the framework to be able to put the proper controls in place
for the $300-billion-plus expenditures. But there are gaps and
holes, some of which we have recommended in the report that we
are releasing today. Certainly adding more accountability in
terms of, at the agency level, the rollup to the top management
of the overall process and situations of a single audit
finding; what kind of management decision memos have been
issued; are they done on a timely basis; what are the
conclusions on that? Have the recipients been notified and what
is the timetable for followup on that? Not only that, it
provides agencywide analysis to be able to understand what's
going on out there in the area of grants and awards across the
board.
We also feel, though, that there are a number of other
areas at a governmentwide level that need to be addressed, many
of which have been mentioned here today. We are concerned about
the universe--that we don't know whether we are receiving all
the required single audits. It's an honor system. We believe
that's solvable. If you roll up that kind of information at the
agency level, you ought to then be able to roll it up at the
governmentwide level and be able to track it, accumulate it,
look at it, understand this recipient that may be getting money
from several different agencies that would fall under the
requirement, even with the increased threshold of a single
audit. It would provide you that kind of information.
Also in terms of what they call the cognizant agency, which
are an agency that's responsible for following up on single
audit findings that may involve money from other agencies. I
think holding them accountable will increase the effectiveness
of the act.
And then as we mentioned, we really believe there should be
State reporting--that's not occurring right now--that goes up
to the agencies, that identifies who those subrecipients are.
Then you can go into the data base and see if those recipients
are actually filing reports. Because right now, all the
clearinghouse can do is to look at those that filed last year
to see whether they filed this year. But if nobody's filed at
all, they do not know that. So State reporting would provide a
number of solutions to many of the problems that have been
mentioned here today: who the subrecipients are, how much money
they're spending. Also we don't know how much the corporations
are getting of these awards as well, and that would identify
that. And then we think the quality needs to be addressed to
make the act more effective.
And there again, as we said, we really don't know the
extent of those problems out there. And we think by
partnerships with the IGs, and the State auditor being directed
from OMB, would significantly give us the data that's needed to
identify whether there is a problem with the quality of the
audits out there.
I'm also a firm believer of performance accountability. We
are holding the Federal agencies accountable for the programs
and the performance and the results of those programs. I think
that the agencies should hold the recipients and the States
should hold the subrecipients also accountable for the results
of those programs.
Mr. Miller. Thank you. Let me ask Mr. Knickerbocker a
question. I think we met before on census issues. Mrs. Maloney
and I chaired that committee for a few years. What type of user
feedback information does the clearinghouse accumulate, and
what could improve the quality of the clearinghouse?
Mr. Knickerbocker. Well, Mr. Chairman, we do have the
Single Audit Act user group. We interact with all the Federal
grant-making agencies. The features of the clearinghouse, both
the data dissemination system and the data collection system,
have been crafted in part on the basis of the guidance from the
user community. In other words, we are quite sensitive that the
mechanics by which we receive the information, make it
available to the agencies, respond to their needs.
So I think that we can say that we do have an active
program of interaction with the Federal agencies. We have
training programs for the Federal agencies to know how to
access the clearinghouse. We are, as I indicated in my
testimony, working with subsidiary groups of the CFO Council on
issues of delinquent audits, how to increase responsiveness
from delinquent audits. I did not mention it in my testimony,
but in part of my written testimony, that we're also working
with the CFO groups on checking the results in the
clearinghouse against the three different Federal payment
systems. I mean, the whole system is quite complex, and one of
the issues is if you look at various ways that moneys move out
to local entities, nonprofit entities, by comparing those money
flows with the auditing flows, can you find discrepancies and
therefore identify organizations that are not reporting and not
fulfilling their auditing responsibilities?
So I suppose my general response is that we see ourselves
as a service organization meeting the needs of the program
agencies. I think the record will show that we've been
responsive to their needs and I'm not aware that, any of the
agencies feel that there are major shortcomings in what we are
doing at this juncture.
Mr. Miller. Thank you. Mr. Hinton, what are some of the key
issues that need to be addressed to ensure quality and
usefulness of audits? And in your testimony you mentioned that
a few States are opposed to the single audit threshold. Can you
elaborate further on their concerns?
Mr. Hinton. With regard to improvement in single audit
quality at the local and the nonprofit level, our position
would--would involve an increased accountability effort on the
part of the IGs, on the part of State auditors, to review these
reports for compliance with the significant sections of the
act. We've been very successful in Georgia, on the local
government side, recently in identifying deficiencies in the
act and thereby being able to--to implement some methods for
improving that.
One thing we also see at the local level is a lack of
education or lack of awareness of the specific aspects of the
Single Audit Act. And that's a twofold problem in that the
entity which is obtaining the audit has a responsibility under
Circular A-133 to engage a competent auditor. And what we see
there is quite often there's a lot of shopping that goes on
with regard to selection of the auditor, and less of a concern
about the quality of the audit that's going to be addressed
there.
Mrs. Maloney. Excuse me. May I ask a question? How are they
able to shop who the auditor is?
Mr. Hinton. Well, I shouldn't say ``shop.'' The attitude is
to get--meet the minimal requirements of Federal regulation,
Federal law, at the lowest cost. And the auditees need to pay
more attention to the qualifications of that particular----
Mrs. Maloney. In other words, the city or State can select
the auditor? I thought the auditors came down from the Federal
gentleman.
Mr. Hinton. No, ma'am.
Mrs. Maloney. So they hire them from outside firms?
Mr. Hinton. Right. There are a variety of situations across
the country. I know in our State----
Mrs. Maloney. What's your State?
Mr. Hinton. Counties--Georgia--counties and municipalities
are required by State statute, and obviously by the Single
Audit Act, to obtain an audit that meets the requirement of the
legislation and the implementing regulation. And it's the
responsibility of who receives the Federal funds or expends
those Federal funds to obtain that audit.
Mrs. Maloney. Then they go to a private firm? I did not
think that--I thought the auditors came down from the IG or
from the government. I did not realize it was private auditors.
Mr. Hinton. No, ma'am.
Mrs. Maloney. How do we know that the auditors are right?
We had the same problem with Enron.
Mr. Hinton. It's not been a good year for auditors.
With regard to the change in the threshold, there are
certain States which have linked the requirements for their
State's monitoring efforts of State grants and such to the
Single Audit Act. And under the Single Audit Act, a portion of
that audit can be paid for with administrative dollars of the
various Federal assistance programs.
By raising the threshold, certain States are concerned that
participation in obtaining the audits might not be available,
that it would drop off a number of their entities which are
tied in their statutes to audit requirements.
However, those States which raised objections to that were
limited, and surveys we conducted over the last 2 years have
indicated favorable support for the $500,000 level.
Mr. Miller. Mr. Martin, how would the increase in the
single audit threshold impact Education's oversight in
monitoring school districts?
Mr. Martin. I don't think it would change the way we
monitor school districts. I think the procedures we have in
place right now, CAROI and the other ways we receive our audit
reports, the fact that we're implementing a new data base,
should help. But I don't think the implementation of the
$500,000 threshold will effect us at all. You know, the
capabilities of our systems are not a function of what that
threshold is.
Mr. Miller. As an appropriator I find this whole question
very interesting, since I'm on Labor-HHS in particular.
This is for Ms. Hanson. What impact will an increase in the
audit threshold have on HUD's monitoring and oversight of
housing authorities that receive Federal financial assistance?
And HUD recently reported $2 billion in net improper payments
in housing subsidy programs. Has the Department used single
audit results as a tool to determine the risk areas in the
housing programs and, if so, how?
Ms. Hanson. Thank you. I will take the first one, and you
will have to remind me of the second one. The impact on
changing the threshold for the Public Housing Agency is not
going to be significant. Currently 1,173 PHAs fall below the
$300,000 threshold, and they have total Federal revenues of
approximately $141 million. Those that are in the neighborhood
of $300,000 to $500,000 it's another 304 PHAs with about $118
million. That still leaves 1,627 PHAs with over $500,000, for
$13.6 billion in Federal revenue.
You weren't here with the earlier question, but we will
still receive the unaudited financial submissions from those
housing authorities, so we will have the opportunity to be
looking, and make an assessment of their financial condition
based on those unaudited financial statements.
We don't believe by raising the threshold, it will impact
our ability to continue our oversight of those housing
authorities.
And the second one was----
Mr. Miller. About the $2 billion that's been reported in
improper payments in the housing subsidy programs. Has the
Department used single audit results as a tool to determine the
risk areas in the housing programs and, if so, how?
Ms. Hanson. Not directly. How we analyze risk assessment in
the Office of Public and Indian Housing is we look at a variety
of features, including the amount of Federal resources going to
that housing authority, performance under the PHAs system, and
compliance issues such as audit findings to determine where we
believe there is a high-risk housing authority that needs our
attention either through additional technical assistance,
greater monitoring of the documents that come in, or actual
onsite attention.
I'm not really prepared to speak to what the Department is
doing, but we do have a very aggressive program of trying to
work up front with the housing authorities and other housing
providers to assist them in validating the information that
residents and potential residents provide.
Mr. Miller. Thank you. Well, this will conclude the
hearing. But let me for the record make some thank-yous to
several people that made this hearing possible:
Russell George, the staff director and chief counsel;
Bonnie Heald, the deputy staff director, Henry Wray, the senior
counsel; Rosa Harris, the GAO detailee; Justin Paulhamus, the
majority clerk; Michael Sazonov, the subcommittee intern;
Sterling Bentley, the subcommittee intern; Joe DiSilvio, the
subcommittee intern; and Yigal Kerszenbaum, subcommittee
intern.
For the minority, David McMillen of the professional staff,
and Ellen Rayner, the chief minority clerk. I thank the
reporters, Michelle Bulkley and Joe Strickland.
With that, I thank you all very much for participating. I
am sorry that Chairman Horn couldn't remain for the whole
hearing, but I thank you very much.
[Whereupon, at 11:40 a.m., the subcommittee was adjourned.]
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