Single Audit
Single Audit Act Effectiveness Issues Gao ID: GAO-02-877T June 26, 2002GAO's review of the Departments of Education, Housing and Urban Development, and Transportation efforts to ensure that federal award recipients corrected single audit findings found that required documentation of management decisions and the evaluation of and conclusions on the adequacy of recipient actions to correct single audit findings was lacking. The Federal Audit Clearinghouse received 34,000 single audit reports during calendar year 2000 with six thousand of these containing audit findings. Despite these impressive figures, questions exist about whether (1) all required single audits are performed, (2) federal award recipients are adequately monitoring subrecipent use of federal awards and the correction of single audit findings, and (3) the audits are performed in accordance with government auditing standards.
GAO-02-877T, Single Audit: Single Audit Act Effectiveness Issues
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Government Efficiency, Financial Management
and Intergovernmental Relations, Committee on Government Reform, House
of Representatives:
For Release on Delivery:
Expected at 10 a.m. EDT:
Wednesday, June 26, 2002:
Single Audit:
Single Audit Act Effectiveness Issues:
Statement of Sally E. Thompson:
Director, Financial Management and Assurance:
GAO-02-877T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to (1) discuss our report,[Footnote 1]
which is being released at this hearing, on the efforts of the
Departments of Education, Housing and Urban Development (HUD), and
Transportation to ensure that federal award recipients take timely and
appropriate actions to correct all single audit findings, and (2)
highlight three issues that merit additional attention to ensure that
single audit efforts are achieving the full benefits envisioned in the
act.
Our review of the efforts of Education, HUD, and Transportation to
ensure that federal award recipients corrected single audit findings
generally found a lack of the required documentation of management
decisions on audit findings and the evaluation of and conclusions on
the adequacy of recipient actions to correct single audit findings. In
commenting on the report, Education and HUD agreed with the findings
and are moving forward to implement the recommendations.
Transportation‘s comments raised several issues concerning both the
scope of our audit work and the appropriateness of our conclusions and
recommendations. Despite the comments and the issues raised, we
continue to believe that our conclusions are sound and that the
recommendations for agency actions are needed to help ensure the
overall effectiveness of agencies‘ implementation of the Single Audit
Act and their consideration and use of single audit findings.
The Federal Audit Clearinghouse, the organization the Office of
Management and Budget (OMB) designated to receive single audit reports
from federal award recipients, received about 34,000 single audit
reports during calendar year 2000. About 5,500 of these reports
contained audit findings. Despite these impressive figures, several
single audit-related issues merit additional attention. These issues
involve questions about whether (1) all required single audits are
performed, (2) federal award recipients are adequately monitoring
subrecipient[Footnote 2] use of federal awards and the correction of
single audit findings, and (3) the audits are performed in accordance
with government auditing standards.
According to OMB, federal awards for fiscal year 2001 totaled about
$325 billion of the $1.8 trillion federal budget. These awards include
grants, loans, loan guarantees, property, cooperative agreements,
interest subsidies, insurance, food commodities, and direct
appropriations and federal cost reimbursements. The Single Audit Act,
passed in 1984 and amended in 1996, is intended to, among other things,
promote sound financial management, including effective internal
controls, with respect to federal awards administered by state and
local governments and nonprofit organizations. Under OMB Circular A-
133, Audits of States, Local Governments, and Non-Profit Organizations,
those governments or organizations that expend $300,000 or more in
federal awards during the fiscal year shall (1) maintain internal
control for federal programs, (2) comply with laws, regulations, and
the provisions of contracts or grant agreements, (3) prepare
appropriate financial statements, including the Schedule of
Expenditures of Federal Awards, (4) ensure that the required single
audits are properly performed and submitted when due, and (5) follow up
and take corrective actions on audit findings.
Three Agencies‘ Practices to Ensure Correction of Single Audit
Findings:
As discussed in the report we are releasing today, our work to review
agency actions to ensure that recipients take timely and appropriate
corrective actions to fix audit findings contained in single audit
reports identified a number of fundamental concerns. Education, HUD, and
Transportation had procedures in place to establish responsibility for
identifying and reviewing single audit findings and for communicating
that information to appropriate officials for action. However, the
audit files at these agencies generally did not contain documentary
evidence that the agencies had prepared management decisions, as
required by OMB Circular A-133, to notify the recipients of the
corrective actions the federal agencies deemed necessary to correct the
audit findings. Also, the files generally did not contain evidence that
agency personnel had evaluated and concluded on the adequacy of the
recipients‘ actions to correct the findings contained in single audit
reports.
OMB Circular A-133 requires each federal agency to issue a written
management decision on audit findings within 6 months of the receipt of
the recipient‘s single audit report. (It is important to note that as
many as 15 months could pass after the recipient‘s year-end date before
the Single Audit Act, as amended, requires a management decision. This
occurs because the legislation gives recipients up to 9 months after
the period audited to file their single audit reports, and agencies
have an additional 6 months to issue the management decisions.) These
decisions document management‘s conclusions on and notification to
recipients on the adequacy of their planned, in progress, or completed
actions to correct audit findings. In order to gauge agencies‘
practices in this area, we selected the 10 grantees awarded the most
money for the two largest programs at each of the three agencies. Our
analysis of actions related to the 20 single audits from each agency
showed that collectively they had issued management decisions for only
75 (31 percent) of the 246 audit findings contained in the single audit
reports included in our review.
The agencies noted several reasons for not preparing written management
decisions including that (1) they considered the audit findings to be
insignificant or not serious, (2) the single audit report stated that
the recipient had corrected the finding prior to the report‘s issuance,
and (3) the subsequent year‘s single audit report indicated that the
recipient had corrected the finding. In our view, none of the reasons
cited justify the nonissuance of a management decision. For example, by
including a finding in a single audit report, auditors are indicating
that the finding is significant since government auditing standards
require auditors to report all significant findings in the report. The
standards identify other means of communicating insignificant findings.
Regarding the use of subsequent-year single audit reports to justify
the nonissuance of a management decision, it should be noted that
single audit reports must be issued no later than 9 months after the
recipient‘s year-end. By waiting for the subsequent year‘s audit
report, as many as 21 months could have expired from the end of the
audit period for which the finding was initially reported to the receipt
of the subsequent year‘s audit report. In our opinion, waiting for the
subsequent audit report would not result in a timely notification to the
recipient of the agency‘s position on an audit finding and the
recipient‘s planned, in progress, or completed corrective actions.
OMB Circular A-133 does not distinguish between the types of findings or
their seriousness when requiring written management decisions. In fact,
ensuring that reported problems have been resolved is a central
requirement under OMB Circular A-133. The circular requires agencies to
ensure that federal award recipients take appropriate and timely
corrective action on audit findings. Program officials at Education,
HUD, and Transportation told us that they follow up on the
implementation of corrective actions through such activities as site
visits, phone conversations, and review of the subsequent year‘s single
audit reports. However, we found very little documentation that
demonstrated agency follow-up actions to ensure that recipients took
the necessary corrective actions on single audit findings or the
results of the follow-up activities cited above. While the audit files
contained copies of recipient documents and other records, the files
did not contain agency evaluations of or conclusions on the adequacy of
the recipient actions cited in those records. This type of
documentation is critical because each of the agencies we reviewed
relied heavily on program, regional, or field offices to ensure that
corrective actions occurred, yet none required reporting on the
corrective action status of all single audit findings. We believe that
the follow-up efforts should be documented and that doing so is a key
to ensuring that agency offices perform their responsibilities to help
ensure that recipients take all necessary corrective actions.
Single audits provide valuable information that agency managers can use
to make operating decisions, monitor performance, and allocate
resources. However, discussions with officials at each of the three
agencies revealed that, even when program or other offices had
information on single audit results and recipient actions to correct
single audit findings, this information was not communicated to top-
level agency management for review, analysis, and possible action. This
reporting can strengthen accountability and oversight by providing
management with information useful in the analyses of both programwide
problems and recurring problems at specific recipients. Further, it can
provide management officials with information relevant to agency
efforts to reduce improper payments ”a key element of The President‘s
Management Agenda, Fiscal Year 2002, initiative to improve financial
performance.
The report we are issuing today contains recommendations that call for
the following actions by the Secretaries of Education, HUD, and
Transportation.
* Ensure that the agency has established and follows guidance to address
the OMB Circular A-133 requirements for all agencies whose awards are
subject to the Single Audit Act, as amended. This guidance should
address areas such as (1) preparing and issuing timely management
decisions that clearly communicate the results of agency analyses of
single audit findings and the adequacy of corrective actions
implemented or planned by the recipient, (2) performing follow-up
procedures to ensure that the recipient implemented adequate corrective
action on a timely basis, and (3) documenting the results of
evaluations of and conclusions on recipients‘ actions to correct audit
findings.
* Implement policies and procedures for reporting information to top-
level agency management on the (1) types and causes of findings
identified in single audit reports and (2) status of corrective
actions.
Other Single Audit Issues:
Aside from the federal agencies‘ responsibility for taking all necessary
actions to ensure that recipients implement timely and appropriate
corrective actions to fix single audit findings, a number of other
single audit-related issues exist. These include questions about
whether:
* all required single audits are conducted;
* recipients perform the required monitoring of subrecipients‘ uses of
federal awards and follow up to ensure that they take timely and
appropriate corrective actions on audit findings, and;
* all single audits comply with government auditing standards.
The Single Audit Act, as amended, requires audits by recipients that
expend $300,000 or more in federal awards during the fiscal year.
Currently, the federal government does not know or have a method for
determining the universe of recipients and subrecipients that meet this
$300,000 threshold. In general, while the federal government does have
disbursement systems that can identify amounts the federal government
awards recipients, it does not have a system or systems to accumulate,
track, and report on amounts actually expended by award recipients and
subrecipients across the federal government. As a result, it is not
possible to determine whether required single audits occur, identify
recipients and subrecipients that have not had required single audits,
or develop adequate follow-up systems to ensure that all required
audits occur. Thus, in many respects, what we have is an honor system
as to which recipients are arranging for single audits.
This information on the audit universe is important if federal agencies
are to have any assurance that recipients and subrecipients receiving
federal awards are receiving the required audits of their financial and
internal control systems and of their compliance with applicable
program laws and regulations. In addition, by ensuring that all
required audits are conducted, federal managers will receive more
complete information on audit findings useful in their governmentwide,
agencywide, and recipient-specific analyses of single audit results and
the $325 billion in federal awards.
Under OMB Circular A-133, federal agencies are to receive single audit
reports with findings relating only to award recipients that received
federal awards directly from the agencies. When these recipients, such
as states, forward awards to subrecipients such as municipalities,
counties, or local governmental units, it becomes the recipient‘s
responsibility under the circular to make sure that the subrecipients
obtain single audits and that they take appropriate action to correct
single audit findings.
A review of the Federal Audit Clearinghouse database[Footnote 3] for
calendar year 2000 showed about 380 cases where the auditors reported
that award recipients were not adequately monitoring their
subrecipients to ensure that they complied with all of the requirements
of the Single Audit Act, as amended. While a very small percentage of
the total single audits, these cases can be significant because they
often represent recipients that receive large amounts of federal
awards, such as states, and pass those awards to subrecipients for
program performance purposes. Therefore, it is very important for
federal agencies to have assurances that the recipients take actions to
ensure that their subrecipients take appropriate and timely actions to
correct all single audit findings. Currently, federal agencies do not
receive information on recipients‘ evaluations of and conclusions on
the appropriateness of subrecipient actions to correct findings
identified in single audit reports. This information is important from
a program management standpoint because it could identify areas where
the federal government needs to increase its oversight efforts or
develop and issue guidance for recipient and subrecipient use when
participating in federal programs and using federal awards.
Single audit quality has been a long-standing area of concern and one
about which questions have surfaced since the passage of the Single
Audit Act in 1984. In this regard, OMB Circular A-133 requires that
cognizant agencies (i.e., those agencies with specific single audit
oversight responsibilities for recipients expending more than $25
million annually in federal awards) conduct or obtain quality control
reviews of selected single audits.
Quality control reviews are reviews of the audit work supporting an
individual audit assignment. They are performed by reviewing the
independent auditor‘s working papers. In our recent survey,[Footnote 4]
which we conducted at your request, respondents reported that federal
agency inspectors general from 10 agencies participated on 109 quality
control reviews during fiscal year 2001. However, this total may be
overstated since offices of inspectors general occasionally perform
joint reviews and our survey did not capture information on the extent
of these collaborative efforts. The survey responses noted that the
reviews identified a range of audit problems including those involving
internal control and/or compliance testing performed by the auditors
and auditor compliance with government auditing standards. While this
limited information on the current audit quality problems cannot be
used to project to or judge the quality of all single audits performed,
it at least raises the possibility that problems continue to exist. OMB
and federal agencies have recognized this potential problem, but a
solution or approach to evaluating the overall quality of single audits
conducted and developing a methodology to address all problems
identified has not yet been developed.
Mr. Chairman, this concludes my statement. I would be happy to answer
any questions you or other members of the subcommittee may have.
Contact and Acknowledgments:
For information about this statement, please contact Sally Thompson,
Director, Financial Management and Assurance, at (213) 830-1065 or at
thompsons@gao.gov. Individuals who made key contributions to this
testimony include Tom Broderick, Marian Cebula, and Perry Datwyler.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, Single Audit: Actions Needed to
Ensure That Findings Are Corrected, [hyperlink,
http://www.gao.gov/products/GAO-02-705] (Washington, D.C.: June 26,
2002).
[2] A subrecipient is a nonfederal entity that expends federal awards
received from another nonfederal entity (i.e., the federal award
recipient) that received awards directly from a federal agency to carry
out a federal program.
[3] The Federal Audit Clearinghouse single audit database was
established as a result of the Single Audit Act Amendments of 1996 and
contains summary information on the auditor, the recipient and its
federal programs, and the audit results.
[4] U.S. General Accounting Office, Single Audit: Survey of CFO Act
Agencies, [hyperlink, http://www.gao.gov/products/GAO-02-376]
(Washington, D.C.: Mar. 15, 2002).
[End of section]
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