Single Audit Quality
Actions Needed to Address Persistent Audit Quality Problems Gao ID: GAO-08-213T October 25, 2007Federal government grants to state and local governments have risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. The single audit is an important mechanism of accountability for the use of federal grants by nonprofit organizations as well as state and local governments. However, the quality of single audits conducted under the Single Audit Act, as amended, has been a longstanding area of concern since the passage of the act in 1984. The President's Council on Integrity and Efficiency (PCIE) recently issued its Report on National Single Audit Sampling Project, which raises concerns about the quality of single audits and makes recommendations aimed at improving the effectiveness and efficiency of those audits. This testimony provides (1) GAO's perspective on the history and importance of the Single Audit Act and the principles behind the act, (2) a preliminary analysis of the recommendations made by the PCIE for improving audit quality, and (3) additional considerations for improving the quality of single audits.
In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees' needs for single, uniformly structured audits. GAO supported the passage of the Single Audit Act, and continues to support the single audit concept and principles behind the act as a key accountability mechanism for federal grant awards. However, the quality of single audits has been a longstanding area of concern since the passage of the act in 1984. In its June 2007 Report on National Single Audit Sampling Project, the PCIE found that, overall, approximately 49 percent of single audits fell into the acceptable group, with the remaining 51 percent having deficiencies severe enough to classify the audits as limited in reliability or unacceptable. PCIE found a significant difference in results by audit size. Specifically, 63.5 percent of the large audits (with $50 million or more in federal award expenditures) were deemed acceptable compared with only 48.2 percent of the smaller audits (with at least $500,000 but less than $50 million in federal award expenditures). The PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. GAO is concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of the single audit reports. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies found and to improve the quality of single audits: (1) revise and improve single audit standards, criteria, and guidance; (2) establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to be able to conduct and continue to perform single audits; and (3) review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. In this testimony, GAO supports PCIE's recommendations and points out issues that need to be resolved regarding the proposed training and other factors that merit consideration when determining actions to improve audit quality. GAO believes that there may be opportunities for considering size when implementing future actions to improve the effectiveness and quality of single audits. In addition, a separate effort considering the overall framework for single audits could answer such questions as whether simplified alternatives can achieve cost-effective accountability in the smallest audits; whether current federal oversight processes for single audits are adequate; and what role the auditing profession can play in increasing single audit quality.
GAO-08-213T, Single Audit Quality: Actions Needed to Address Persistent Audit Quality Problems
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Testimony:
Before the Senate Subcommittee on Federal Financial Management,
Government Information, Federal Services, and International Security,
Committee on Homeland Security and Governmental Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:30 p.m. EDT:
Thursday, October 25, 2007:
Single Audit Quality:
Actions Needed to Address Persistent Audit Quality Problems:
Statement of Jeanette M. Franzel Director, Financial Management and
Assurance:
GAO-08-213T:
GAO Highlights:
Highlights of GAO-08-213T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal Services,
and International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
Federal government grants to state and local governments have risen
substantially, from $7 billion in 1960 to almost $450 billion budgeted
in 2007. The single audit is an important mechanism of accountability
for the use of federal grants by nonprofit organizations as well as
state and local governments. However, the quality of single audits
conducted under the Single Audit Act, as amended, has been a
longstanding area of concern since the passage of the act in 1984. The
President‘s Council on Integrity and Efficiency (PCIE) recently issued
its Report on National Single Audit Sampling Project, which raises
concerns about the quality of single audits and makes recommendations
aimed at improving the effectiveness and efficiency of those audits.
This testimony provides (1) GAO‘s perspective on the history and
importance of the Single Audit Act and the principles behind the act,
(2) a preliminary analysis of the recommendations made by the PCIE for
improving audit quality, and (3) additional considerations for
improving the quality of single audits.
What GAO Found:
In the early 1980s, Congress had concerns about a lack of adequate
oversight and accountability for federal assistance provided to state
and local governments. In response to concerns that large amounts of
federal financial assistance were not subject to audit and that
agencies sometimes overlapped on oversight activities, Congress passed
the Single Audit Act of 1984. The act adopted the single audit concept
to help meet the needs of federal agencies for grantee oversight as
well as grantees‘ needs for single, uniformly structured audits. GAO
supported the passage of the Single Audit Act, and continues to support
the single audit concept and principles behind the act as a key
accountability mechanism for federal grant awards. However, the quality
of single audits has been a longstanding area of concern since the
passage of the act in 1984.
In its June 2007 Report on National Single Audit Sampling Project, the
PCIE found that, overall, approximately 49 percent of single audits
fell into the acceptable group, with the remaining 51 percent having
deficiencies severe enough to classify the audits as limited in
reliability or unacceptable. PCIE found a significant difference in
results by audit size. Specifically, 63.5 percent of the large audits
(with $50 million or more in federal award expenditures) were deemed
acceptable compared with only 48.2 percent of the smaller audits (with
at least $500,000 but less than $50 million in federal award
expenditures). The PCIE report presents compelling evidence that a
serious problem with single audit quality continues to exist. GAO is
concerned that audits are not being conducted in accordance with
professional standards and requirements. These audits may provide a
false sense of assurance and could mislead users of the single audit
reports.
The PCIE report recommended a three-pronged approach to reduce the
types of deficiencies found and to improve the quality of single
audits: (1) revise and improve single audit standards, criteria, and
guidance; (2) establish minimum continuing professional education (CPE)
as a prerequisite for auditors to be eligible to be able to conduct and
continue to perform single audits; and (3) review and enhance the
disciplinary processes to address unacceptable audits and for not
meeting training and CPE requirements.
In this testimony, GAO supports PCIE‘s recommendations and points out
issues that need to be resolved regarding the proposed training and
other factors that merit consideration when determining actions to
improve audit quality. GAO believes that there may be opportunities for
considering size when implementing future actions to improve the
effectiveness and quality of single audits. In addition, a separate
effort considering the overall framework for single audits could answer
such questions as whether simplified alternatives can achieve cost-
effective accountability in the smallest audits; whether current
federal oversight processes for single audits are adequate; and what
role the auditing profession can play in increasing single audit
quality.
What GAO Recommends:
GAO supports PCIE‘s recommendations and points out factors for
consideration in determining actions, including (1) audit quality
problems by size of audit and (2) the distribution of audits by size.
GAO also suggests a separate effort to evaluate the framework for
single audits.
To view the full product, including the scope and methodology, click on
GAO-08-213T. For more information, contact Jeanette Franzel at (202)
512-9471 or franzelj@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss GAO's analysis of the results
of the Report on National Single Audit Sampling Project[Footnote 1]
recently issued by the President's Council on Integrity and Efficiency
(PCIE) under the direction of the Office of Management and Budget
(OMB). First, I would like to commend the PCIE for conducting this
comprehensive and important study dealing with the quality of single
audits. The single audit is a key accountability mechanism over the use
of federal grants and other awards. In fiscal year 2007, $449 billion
in federal grants was budgeted to state and local governments. The PCIE
report raises significant concerns about the quality of single audits,
and makes recommendations aimed at improving the effectiveness and
efficiency of those audits.
Today, I will provide (1) GAO's perspective on the history and
importance of the Single Audit Act and the principles behind the act,
(2) our preliminary analysis of the recommendations made by the PCIE
for improving audit quality, and (3) additional factors for
consideration for improving the quality of single audits. My statement
today is based on our continuing work as the standards setter for
generally accepted government auditing standards (GAGAS) and our
related work in the area of single audits, including ongoing
interaction with key stakeholders in the single audit process and
members of the auditing profession providing single audit services to
recipients of federal awards. In addition, this statement is based on
our analysis of the PCIE report, and our discussions with the PCIE
project team, the American Institute of Certified Public Accountants
(AICPA), and OMB.
Evolution of the Single Audit Act and Its Underlying Principles:
In the early 1980s, Congress had concerns about a lack of adequate
oversight and accountability for federal assistance[Footnote 2]
provided to state and local governments. Before passage of the Single
Audit Act in 1984 (the act), the federal government relied on audits of
individual grants to help gain assurance that state and local
governments were properly spending federal assistance. Those audits
focused on whether the transactions of specific grants complied with
program requirements. The audits usually did not address financial
controls and were, therefore, unlikely to find systemic problems with
an entity's fund management. Further, individual grant audits were
conducted on a haphazard schedule, which resulted in large portions of
federal funds being unaudited each year. In addition, the auditors
conducting the individual grant audits did not coordinate their work
with the auditors of other programs. As a result, some entities were
subject to numerous grant audits each year, while others were not
audited for long periods.
In response to concerns that large amounts of federal financial
assistance were not subject to audit and that agencies sometimes
overlapped on oversight activities, Congress passed the Single Audit
Act of 1984.[Footnote 3] The act stipulated that state and local
governments that received at least $100,000 in federal financial
assistance in a fiscal year have a single audit conducted for that
year. The concept of a single audit was created to replace multiple
grant audits with one audit of an entity as a whole. State and local
governments which received between $25,000 and $100,000 in federal
financial assistance had the option of complying with audit
requirements of the act or the audit requirements of the federal
program(s) that provided the assistance. The objectives of the Single
Audit Act, as amended, are to:
* promote sound financial management, including effective internal
control, with respect to federal awards administered by nonfederal
entities;
* establish uniform requirements for audits of federal awards
administered by nonfederal entities;
* promote the efficient and effective use of audit resources;
* reduce burdens on state and local governments, Indian tribes, and
nonprofit organizations; and:
* ensure that federal departments and agencies, to the maximum extent
practicable, rely upon and use audit work done pursuant to the act.
The Single Audit Act adopted the single audit concept to help meet the
needs of federal agencies for grantee oversight as well as grantees'
needs for single, uniformly structured audits. Rather than being a
detailed review of individual grants or programs, the single audit is
an organizationwide financial statement audit that includes the audit
of the Schedule of Expenditures of Federal Awards (SEFA)[Footnote 4]
and also focuses on internal control and the recipient's compliance
with laws and regulations governing the federal financial assistance
received. The act also required that grantees address material
noncompliance and internal control weaknesses in a corrective action
plan, which is to be submitted to appropriate federal officials. The
act further required that single audits be performed in accordance with
GAGAS issued by GAO. These standards provide a framework for conducting
high-quality financial audits[Footnote 5] with competence, integrity,
objectivity, and independence.
The Single Audit Act Amendments of 1996[Footnote 6] refined the Single
Audit Act of 1984 and established uniform requirements for all federal
grant recipients. The refinements cover a range of fundamental areas
affecting the single audit process and single audit reporting,
including provisions to:
* extend the law to cover all recipients of federal financial
assistance, including, in particular, nonprofit organizations,
hospitals, and universities;
* ensure a more cost-beneficial threshold for requiring single audits;
* more broadly focus audit work on the programs that present the
greatest financial risk to the federal government;
* provide for timely reporting of audit results;
* provide for summary reporting of audit results;
* promote better analyses of audit results through establishment of a
federal clearinghouse and an automated database; and:
* authorize pilot projects to further streamline the audit process and
make it more useful.
The 1996 amendments required the Director of OMB to designate a Federal
Audit Clearinghouse (FAC) as the single audit repository,[Footnote 7]
required the recipient entity to submit financial reports and related
audit reports to the clearinghouse no later than 9 months after the
recipient's year-end, and increased the audit threshold to $300,000.
The criteria for determining which entities are required to have a
single audit are based on the total amount of federal awards[Footnote
8] expended by the entity. The initial dollar thresholds were designed
to provide adequate audit coverage of federal funds without placing an
undue administrative burden on entities receiving smaller amounts of
federal assistance. When the act was passed, the dollar threshold
criteria for the audit requirement were targeted toward achieving audit
coverage for 95 percent of direct federal assistance to local
governments. As part of OMB's biennial threshold review required by the
1996 amendments, OMB increased the dollar threshold for requirement of
a single audit to $500,000 in 2003 for fiscal years ending after
December 31, 2003.
Federal oversight responsibility for implementation of the Single Audit
Act is currently shared among various entities--OMB, federal agencies,
and their respective Offices of Inspector General (OIG). The Single
Audit Act assigned OMB the responsibility of prescribing policies,
procedures, and guidelines to implement the uniform audit requirements
and required each federal agency to amend its regulations to conform to
the requirements of the act and OMB's policies, procedures, and
guidelines. OMB issued Circular No. A-133, Audits of States, Local
Governments, and Non-Profit Organizations, which sets implementing
guidelines for the audit requirements and defines roles and
responsibilities related to the implementation of the Single Audit
Act.[Footnote 9] The federal agency that awards a grant to a recipient
is responsible for ensuring recipient compliance with federal laws,
regulations, and the provisions of the grant agreements. The awarding
agency is also responsible for overseeing whether the single audits are
completed in a timely manner in accordance with OMB Circular No. A-133
and for providing annual updates of the Compliance Supplement[Footnote
10] to OMB. Some federal agencies rely on the OIG to perform quality
control reviews (QCR) to assess whether single audit work performed
complies with OMB Circular No. A-133 and auditing standards.
The grant recipient (auditee) is responsible for ensuring that a single
audit is performed and submitted when due, and for following up and
taking corrective action on any audit findings. The auditor of the
grant recipient is required to perform the audit in accordance with
GAGAS. A single audit consists of (1) an audit and opinions on the fair
presentation of the financial statements and the SEFA; (2) gaining an
understanding of internal control over federal programs and testing
internal control over major programs; and (3) an audit and an opinion
on compliance with legal, regulatory, and contractual requirements for
major programs. The audit also includes the auditor's schedule of
findings and questioned costs, and the auditee's corrective action
plans and a summary of prior audit findings that includes planned and
completed corrective actions. Under GAGAS, auditors are required to
report on significant deficiencies in internal control and on
compliance associated with the audit of the financial statements.
Recipients expending more than $50 million in federal funding ($25
million prior to December 31, 2003) are required to have a cognizant
federal agency for audit in accordance with OMB Circular No. A-133. The
cognizant agency for audit is the federal awarding agency that provides
the predominant amount of direct funding to a recipient unless OMB
otherwise makes a specific cognizant agency assignment. The cognizant
agency for audit provides technical audit advice, considers requests
for extensions to the submission due date for the recipient's reports,
obtains or conducts QCRs, coordinates management decisions for audit
findings, and conducts other activities required by OMB Circular No. A-
133. According to OMB officials, the FAC single audit database
generates a listing of those agencies that should be designated
cognizant agencies for audit based on information on recipients
expending more than $50 million. The officials also stated that OMB is
responsible for notifying both the recipient and cognizant agency for
audit of the assignment. Federal award recipients that do not have a
cognizant agency for audit are assigned an oversight agency for audit,
which provides technical advice and may assume some or all of the
responsibilities normally performed by a cognizant agency for audit.
Federal grant awards to state and local governments have increased
significantly since the Single Audit Act was passed in 1984. Because
single audits represent the federal government's primary accountability
tool over billions of dollars each year in federal funds provided to
state and local governments and nonprofit organizations, it is
important that these audits are carried out efficiently and
effectively. As shown in figure 1, the federal government's use of
grants to state and local governments has risen substantially, from $7
billion in 1960 to almost $450 billion budgeted in 2007.
Figure 1: Increase in Federal Grant Awards to State and Local
Governments between 1960 and 2007:
This figure is a bar chart showing the increase in federal grant awards
to state and local governments between 1960 and 2007.
[See PDF for image]
Source: OMB.
Notes: Data from the Budget for Fiscal Year 2008, Historical Tables.
The above figures do not include grants made directly by federal
agencies to nongovernmental organizations.
[A] The Single Audit Act was enacted in 1984.
[End of figure]
GAO supported the passage of the Single Audit Act, and we continue to
support the single audit concept and principles behind the act as a key
accountability mechanism over federal grant awards. However, the
quality of single audits conducted under this legislation has been a
longstanding area of concern since the passage of the Single Audit Act
in 1984. During the 1980s, GAO issued reports[Footnote 11] that
identified concerns with single audit quality, including issues with
insufficient evidence related to audit planning, internal control and
compliance testing, and the auditors' adherence to GAGAS. The federal
Inspectors General as well have found similar problems with single
audit quality. The deficiencies we cited during the 1980s were similar
in nature to those identified in the recent PCIE report.
Results of PCIE Report Identify Serious Single Audit Quality Issues:
In June 2002, GAO and OMB testified at a House of Representatives
hearing about the importance of single audits and their
quality.[Footnote 12] In its testimony,[Footnote 13] OMB identified
reviews of single audit quality performed by several federal agencies
that disclosed deficiencies. However, OMB emphasized that an accurate
statistically based measure of audit quality was needed, and should
include both a baseline of the current status and the means to monitor
quality in the future. We also recognized in our testimony the need for
a solution or approach to evaluate the overall quality of single
audits.
To gain a better understanding of the extent of single audit quality
deficiencies, OMB and several federal OIGs decided to work together to
develop a statistically based measure of audit quality, known as the
National Single Audit Sampling Project. The work was conducted by a
committee of representatives from the PCIE, the Executive Council on
Integrity and Efficiency (ECIE), and three State Auditors, with the
work effort coordinated by the U.S. Department of Education OIG. The
Project had two primary objectives:
* to determine the quality of single audits by performing QCRs of a
statistical sample of single audits, and:
* to make recommendations to address any audit quality issues noted.
The project conducted QCRs of a statistical sample of 208 audits
randomly selected from a universe of over 38,000 audits submitted and
accepted for the period April 1, 2003, through March 31, 2004. The
sample was split into two strata:
* Stratum 1: entities with $50 million or more in federal award
expenditures, and:
* Stratum 2: entities with less than $50 million in federal award
expenditures (with at least $500,000).
The above split in the sample strata corresponds with the current
threshold for designating a cognizant agency, which is for entities
that expend more than $50 million in a year in federal awards. Table 1
shows the universe and strata used in the analysis and the reviews
completed in the National Single Audit Sampling Project.
Table 1: Sample Universe for National Single Audit Sampling Project:
Stratum 1[A];
Sample size: 96;
Universe: 852;
Total federal awards for audits in universe (dollars in billions):
737.2.
Stratum 2[B];
Sample size: 112;
Universe: 37,671;
Total federal awards for audits in universe (dollars in billions):
143.1.
Total;
Sample size: 208;
Universe: 38,523;
Total federal awards for audits in universe (dollars in billions):
880.2.
Source: President's Council on Integrity and Efficiency and Executive
Council on Integrity and Efficiency.
Notes: Data from Report on National Single Audit Sampling Project (June
21, 2007). The $880.2 billion differs from the federal grant funding
for the audit period covered in the PCIE report due to the double
counting associated with pass-through entities that provide federal
awards to a subrecipient to carry out a federal program.
[A] Entities with $50 million in federal award expenditures.
[B] Entities with
