United States General Accounting Office

GAO Report to Congressional Committees

August 1997 KENNEDY CENTER

Audit Duplication Can

Be Prevented

GAO/GGD-97-161

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-277198 

August 19, 1997

The Honorable John H. Chafee

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Environment and Public Works

United States Senate

The Honorable Bud Shuster

Chairman

The Honorable James L. Oberstar

Ranking Minority Member

Committee on Transportation and Infrastructure

House of Representatives

Since its inception, The John F. Kennedy Center for the Performing Arts

(the Center) has annually contracted with a public accounting firm (the

auditor) to perform an audit of its financial statements and provide it with

a report on whether those statements present fairly the financial position

of the Center. According to Center officials, the financial statement audit

is undertaken for several reasons, including the following: first, in

response to the requirement in 20 U.S.C. 76l (c) that the Board of Trustees

submit to Congress an annual report of its operations, which includes a

detailed statement of all public and private money received and disbursed;

second, to provide grantors from whom the Center receives funding an

accounting of the use of such funds; and third, to assist the Board in

carrying out its trust responsibilities under the statute. For these reasons,

the officials to whom we spoke said that, in their opinion, the general

fiduciary standards governing the responsibilities of the Kennedy Center

trustees and officers effectively require an annual audit of its financial

statements.

The John F. Kennedy Center Act Amendments of 19941

 (the Amendments)

provide that not less than once every 3 years we are to audit and review

the accounts of the Center for the purpose of examining expenditures of

funds appropriated in fiscal years 1995 through 1999 for maintenance,

repair, and security, and capital projects under the Amendments and for

compliance with the Amendments’ limitation on the use of those funds for

performing arts functions. Beginning with the Center’s fiscal year 1995

financial statements, the appropriations were included in the Center’s

1

Section 5(d) of the John F. Kennedy Center Act Amendments of 1994, Public Law 103-279, 108 Stat.

1409, 1415-1416 (1994), which amended Section 6 of the John F. Kennedy Act, 20 U.S.C. 76l.

Page 1 GAO/GGD-97-161 Audit Duplication
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financial statements and, therefore, were subject to the financial statement

audit. Thus, our initial audit under the Amendments would cover

appropriated funds for fiscal years 1995 through 1996, while our

subsequent audit would cover fiscal years 1997 through 1999.

As we performed the work necessary to plan our own audit, we recognized

that because the appropriated funds were included in the financial

statements and those financial statements were audited annually, the

Center’s use of those funds would, if we performed our audit, be subject to

multiple audits. In the past, in other instances of possible multiple audit

requirements, Congress and the executive branch have provided guidance

that emphasizes the need for the efficient use of audit resources through

the coordination of audit work and the elimination of duplication.

We discussed with your offices the potential for duplication of effort

arising from multiple audit requirements involving the Center’s

appropriated funds. We agreed to determine whether we should continue

the work necessary to plan and do our own audit, and if continuation of

our work did not appear prudent, to seek legislative relief from the audit

requirement. In this regard, we looked to see whether the auditor planned

and carried out an audit that complied with the standards set forth in the

Government Auditing Standards since both our audit and the auditor’s are

subject to those standards. We developed information and obtained

documentation about the auditor’s planned and executed audit work,

reviewed some working papers prepared by the auditor, and obtained the

reports on the financial statements and compliance with laws and

regulations that the auditor had prepared and issued to Center

management.

Results in Brief The information and documentation we obtained from the Center and the

auditor and the auditor’s records we reviewed demonstrated that our

audit, if implemented, would duplicate those portions of the auditor’s

work involving the understanding of internal controls, sampling of

expenditures, and testing for compliance with the limitation on the use of

the appropriated funds. Further, the auditor planned and executed the

audit under the Government Auditing Standards, which governs our audit

work as well.

In the future, according to Center officials, the Center plans both to

continue to annually contract with a public accounting firm for a financial

statement audit that will include the use of appropriated funds and to

Page 2 GAO/GGD-97-161 Audit Duplication
B-277198 

require that its auditor’s work be subject to the Government Auditing

Standards. Further, at our suggestion, Center officials revised the contract

with the auditor, beginning with the fiscal year 1997 audit, to require that

the auditor’s report specifically state the tests undertaken for compliance

with the limitation on the use of appropriated funds and the results of

those tests.

On the basis of the information we developed, we believe that efficient use

of our audit resources would best be achieved by the Center’s continued

contracting for a single annual audit of its financial statements subject to

the Government Auditing Standards. This audit would include both the use

of the appropriated funds and compliance with limitations on the use of

those funds. Therefore, as agreed with your offices, we are seeking

legislative relief from the requirement for us to periodically audit the

Center’s use of appropriated funds.

Background The Kennedy Center, established in 19642

 as both a national cultural arts

center and a living memorial to the 35th President, opened in

September 1971. Shortly thereafter, in 1972, the Secretary of the Interior,

through the National Park Service, assumed responsibility for building

maintenance, security, interpretative, janitorial, and all other services

necessary for the operations of the Kennedy Center not related to the

performing arts.

In 1994, the Amendments transferred responsibility for the work

performed by the National Park Service to the Kennedy Center Board of

Trustees and also authorized the appropriation of funds, beginning in

fiscal year 1995, to the Board for this work. The Center’s financial

statements for fiscal years 1995 and 1996 reflected the appropriation

received as either operating revenue and expense or capital assets.

Under 31 U.S.C. 712, we are authorized to “investigate all matters related

to the receipt, disbursement, and use of public money.” In addition, the

John F. Kennedy Center Act Amendments of 1994 provide that we are to

audit and review the accounts funded by appropriations authorized by

those amendments at least once every 3 years.

2

In 1958, The National Cultural Center Act, authorized a National Cultural Center in the District of

Columbia, which on Jan. 23, 1964, was renamed the John F. Kennedy Center for the Performing Arts.

Page 3 GAO/GGD-97-161 Audit Duplication
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Objectives, Scope,

and Methodology

As agreed with your offices, our objective was to determine whether an

audit by us would duplicate work done by the Center’s auditor. Further, if

we determined that duplication was a problem we would seek legislative

relief from the requirement to do our own audit of the Center’s use of

appropriated funds.3

 In this regard, we

• examined the auditor’s audit scope and plan;

• reviewed the reports issued by the auditor;

• developed independently our own understanding of the Center’s internal

control process for managing federal appropriations authorized by the

Amendments; and

• developed an understanding of the auditor’s actual performance of the

audit through (1) discussions with staff of the auditor and Center staff

involved in the audit, (2) comparison with requirements in the

Government Auditing Standards, and (3) review of selected working

papers prepared by the auditor and documentation related to the audit

provided by the auditor and the Center.

The field work standards in the Government Auditing Standards set forth

general guidelines for undertaking the detailed audit work necessary to

evaluate an auditee’s financial statements. The field work standards

include properly planning the audit to (1) consider materiality in

determining the audit procedures, (2) follow up on prior findings and

recommendations, (3) obtain a sufficient understanding of internal

controls to plan the audit, and (4) provide reasonable assurance of

detecting irregularities that have a direct and material impact on the

financial statements.

The Government Auditing Standards also contain general guidelines for

reporting on financial audits. Regarding reporting on compliance with

laws and regulations, the reporting standards require that the auditor

report both the scope of testing of compliance with laws and regulations

and the results of those tests either in the financial statement report or a

separate report.

Because both our work and that of the Center’s auditor are subject to the

Government Auditing Standards, we looked for elements of the standards

in the audit scope and plan of the auditor. Our rationale was that the

presence of these elements in the auditor’s planned work would constitute

3

Our approach was discussed in our May 28, 1997, letter to the Chairmen and Ranking Minority

Members of the Senate Subcommittee on Transportation and Infrastructure and the House

Subcommittee on Public Buildings and Economic Development, in which we described our objectives,

scope, and methodology for this assignment.

Page 4 GAO/GGD-97-161 Audit Duplication
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evidence of the duplication that would have occurred when we prepared

and carried out our audit scope and plan in accordance with the standards.

To ensure that the auditor performed the audit work detailed in its audit

plan, we checked for evidence of this work in the auditor’s records

involving sampled expenditure transactions.

To address how to proceed when we were confronted with the multiple

audit situation at the Center, we looked at selected federal program audit

guidance.4

 We found that this guidance, both in federal law and executive

branch policy, provides direction regarding what an auditor is to do when

confronted with an auditee subject to multiple audits. This direction is as

follows:

• Audits by different auditors should be coordinated,

• Duplication of audit work should be avoided,

• Auditors should reduce the burden on the auditee, and

• Audit resources should be efficiently used.

To document the scope of the auditor’s plan for staffing and undertaking

the audit work in accordance with Government Auditing Standards, we

obtained

• the audit plan for testing appropriated funds;

• the internal control memorandum prepared by the auditor in planning the

work;

• reports issued to the Center as a result of the work;

• documentation on the audit staff’s qualifications, independence, and prior

experience at the Center and with federal appropriated funds audits; and

• the external critique of the auditor’s practice as reflected by the external

peer review opinion.

We did not, as part of our work, perform a detailed review of all of the

documentation contained in the auditor’s files supporting its audit of

appropriated funds nor reperform tests conducted by the auditor because

it was not our intent to use the auditor’s work to develop our own report

or opinion on the Center’s use of appropriated funds and its compliance

with the restrictions on the use of the appropriations. However, we

completed the work we deemed necessary to confirm the auditor’s

documented understanding of internal controls. In addition, we did

4

The Single Audit Act of 1984, 31 U.S.C. 7501-7507; Audits of State and Local Governments, Office of

Management and Budget, Circular No. A-128, Apr. 12, 1985; and Audits of Institutions of Higher

Education and Other Nonprofit Institutions, Office of Management and Budget, Circular No. A-133,

Mar. 8, 1990.

Page 5 GAO/GGD-97-161 Audit Duplication
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conduct a limited review of the auditor’s documentation for some of the

sampled transactions and held discussions with the auditor’s and Center’s

staffs to obtain an understanding of the work performed concerning

compliance with appropriation law. For example, we reviewed some of

the auditor’s records to verify that they contained evidence of an

examination of a sample of the Center’s appropriated funds transactions.

On August 5, 1997, we provided a draft of this report to the Chairman of

the Kennedy Center for review and comment. The Center’s comments are

discussed at the end of this report.

The Work of the

Auditor Was

Governed by

Contractual

Agreement and

Implemented Using

an Audit Plan

We assessed the potential for our duplicating the auditor’s work by

focusing on the objectives and audit work envisioned by the two

documents that guided that work—the engagement letter (the contractual

agreement) and the audit plan. These documents established the

objectives that the audit had to fulfill and defined how the auditor was to

proceed to achieve those objectives. The letter specified (1) the

agreed-upon scope of work, (2) the general limitations of the audit, and

(3) the reports to be provided to the Center as a result of the general work.

To implement the terms and conditions of the engagement letter, the

auditor developed a detailed plan, known as the audit plan, that laid out

the specific steps for testing appropriated expenditures, including sample

selection, tests of sampled transactions, and internal summaries and

documents to be produced.

The Engagement Letter

Established the Financial

Statement Audit Objectives

We obtained the July 21, 1996, engagement letter between the Center and

the auditor that set forth the contractual terms for the Center’s fiscal year

1996 financial statement audit. The engagement letter included both a

statement of the scope of the audit and the terms and conditions for

completing the work. The auditor’s scope included work at The John F.

Kennedy Center for the Performing Arts; the National Symphony

Orchestra; the Kennedy Center Productions, Inc.; and the Kennedy Center

Electronic Media Technologies, Inc.

Reflecting the field work standard requirements of the Government

Auditing Standards, the engagement letter set forth the terms of the audit

in a section entitled Audit Responsibilities and Limitations. This section

required that (1) the audit be conducted in accordance with generally

accepted auditing standards, the standards contained in the Government

Page 6 GAO/GGD-97-161 Audit Duplication
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Auditing Standards;

5

 and OMB Circular A-133, “Audits of Institutions of

Higher Education and Other Non-Profit Institutions;” (2) the auditor

conduct the audit by examining, on a test basis, the evidence supporting

the amounts and disclosures in the financial statements; and (3) in

addition to the opinion on the financial statements, a report, or reports, on

the Center’s internal controls and compliance with laws and regulations be

issued to Center management.

The Audit Plan Laid Out

the Steps for Achieving the

Audit Objectives

To manage the work necessary to meet the requirements of the audit as

specified in the engagement letter, the auditor developed a step-by-step

audit plan for testing of appropriated expenditures. The audit plan

included specific objectives for the work, such as determining whether

(1) appropriations were properly recorded; (2) accounting procedures and

controls conformed to established procedures, and that such procedures

were operating effectively and provided proper control over appropriated

funds disbursements; and (3) capital project fund balances had been

properly classified using the following categories: invested capital,

obligated but not invoiced, and unobligated.

The audit plan laid out the specific steps to be undertaken to test

expenditures of appropriated funds. These steps included

• obtaining an understanding of the flow of federal transactions through

discussions with appropriate personnel;

• completing a random disbursement test for operation and maintenance

and capital expenditures by sampling the universe of each type of

transaction;

• obtaining documentation for each sample transaction and testing it for

approvals, signatures, recording of vendor and amount in the financial

records, receipt of purchased item(s); and

• testing compliance with statutory limitations on the use of appropriations.

Our review of some auditor documentation of its tests, discussions with

the auditor’s staff about those tests, and discussions with audited Center

staff confirmed that the auditor did carry out the audit steps set forth in its

audit plan regarding the Center’s use of appropriated funds.

5

The Government Auditing Standards for financial audits incorporate the American Institute of

Certified Public Accountants Statements on Auditing Standards, often referred to as generally

accepted auditing standards (GAAS).

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Auditor Issued Various

Reports to Kennedy Center

Managers at Audit

Conclusion

The auditor’s engagement letter, reflecting the reporting standards in the

Government Auditing Standards, provided that the auditor was to issue

several reports to Center management at the conclusion of its work, which

gave the Kennedy Center a clean opinion on its financial statements for

fiscal years 1995 and 1996. On November 27, 1996, the auditor issued

reports covering the financial statements audit as well as work done as

part of the financial statement work on internal controls and compliance

with laws and regulations. Specifically, these reports were entitled

(1) Financial Statements As of September 29, 1996, and October 1, 1995,

Together With Auditors’ Report, to the Board of Trustees;

(2) OMB Circular A-133 Supplementary Financial Report For the Fiscal

Year Ended September 29, 1996, Together with Auditors’ Reports, to the

Board of Trustees; and

(3) Comments and Suggestions for Consideration For the Year Ended

September 29, 1996, to the President of the Kennedy Center.

We also noted that the auditor, again reflecting the reporting requirements

of the Government Auditing Standards, included an update of prior-year

audit comments and suggestions in the Comments and Suggestions letter.

Areas of Potential

Duplication Exist in

Our Work and the

Work of the Auditor

The work we undertook in planning our own audit convinced us that had

we performed our own audit of the Center’s use of appropriated funds, we

would have duplicated the work of the auditor. The areas of duplication

included

• developing an understanding of the Center’s internal control process for

appropriated expenditures;

• testing expenditure transactions for compliance with law and with the

limitation on the use of appropriated funds; and

• preparing and issuing a report, or reports, on the use of appropriated

funds, internal controls, and compliance with the law and the limitation on

the use of these funds.

To assess the likelihood of duplication, we obtained documentation from

the auditor, reviewed some documentation in the auditor’s records of the

testing of sampled transactions, and discussed the audit work with the

auditor’s staff and Center staff involved in the audit. We focused on the

Page 8 GAO/GGD-97-161 Audit Duplication
B-277198 

auditor’s understanding of internal controls, tests of transactions, and

compliance with the limitation on the use of the appropriated funds.

Auditor Developed

Understanding of Internal

Controls in Planning

Audit Work

The auditor, in applying the field work standards for developing an

understanding of internal controls, prepared an August 19, 1996, internal

control memorandum entitled “Purchasing Procedures for Federal

Acquisitions.” The memorandum, according to auditor staff, represented

the auditor’s understanding, from discussions with Center staff, of the

process by which the Center makes purchases using the appropriated

funds.

In completing the work necessary in planning our own audit, we discussed

appropriated funds procedures with Center staff and obtained Center

appropriated funds financial reports and documentation from several

purchase/contract files to develop our own understanding of the Center’s

process for making purchases using appropriated funds. Although we did

not prepare an internal control memorandum, we were able to confirm the

process that the auditor presented in the August 19, 1996, memorandum.

We found the auditor’s memorandum accurately reflected our own

understanding of the Center’s controls over the use of appropriated funds.

Auditor Tested Samples of

Appropriation Expenditure

Transactions

The auditor, in applying the field work standards for testing of

transactions, selected a sample of the operation and maintenance and

capital improvement appropriations expenditures for use in testing

transactions. The auditor advised us that its sample was selected from the

universe of expenditures in the fiscal year for each type of funding. To

plan for our own tests of the use of appropriated funds, we identified and

obtained expenditure records from the Center that provided the universe

of expenditures by fiscal year and type of funding. Although we did not

proceed to select and test our own sample, on the basis of the auditor’s

audit plan and the sampling used by the auditor, we concluded that the

auditor’s planned procedures were adequate.

By reviewing the auditor’s plan and the documentation we obtained from

the records prepared by the auditor related to the testing of transactions,

and our discussions with both the auditor’s staff and staff at the Center,

we developed an understanding of the work performed by the auditor in

its specific testing of documentation supporting each sampled

expenditure. The auditor’s plan included verifying that documentation

existed, that appropriate signatures and approvals were thereon, and that

Page 9 GAO/GGD-97-161 Audit Duplication
B-277198 

the financial aspects of the transaction were recorded. The documentation

we obtained from the auditor showed that it sampled 37 maintenance,

repair, and security expenditure transactions and 36 capital projects

expenditure transactions. We believe that had we proceeded to do our

own audit, our approach would have been similar to the one used by the

Center’s auditor.

Auditor’s Report Did Not

Specifically Reflect

Coverage of Tests for

Compliance With

Limitation on Use of Funds

In addition to the uses for which funds were authorized—namely,

maintenance, repair, and security, and capital projects—the Amendments

imposed a specific limitation on the use of funds to support performing

functions. This limitation provided that

“No funds appropriated pursuant to this section may be used for any direct

expense incurred in the production of a performing arts attraction, for

personnel who are involved in performing arts administration (including

any supply or equipment used by the personnel), or for production,

staging, public relations, marketing, fundraising, ticket sales, or

education.”6

The auditor’s plan, audit records, and our discussions with both the

auditor’s staff and staff of the Center provided us with an understanding of

the work both planned and performed by the auditor in the testing of

compliance with the limitation on the use of appropriated funds in support

of performing functions. For each sampled transaction, the auditor

considered whether the expenditure was consistent with the act’s

limitation. Had we continued with the work necessary to plan and do our

own audit, we would have developed and executed tests to determine

whether expenditures were consistent with the Amendments’ limitation.

Although the auditor tested transactions for compliance with the statutory

limitation on the use of appropriated funds, its report on compliance with

provisions of laws neither listed this limitation among those for which

compliance was tested nor provided information specifically relating to

the Center’s compliance with the limitation as evidenced by the auditor’s

tests. We brought this matter to the attention of Center officials. We

suggested that they include a contractual requirement in future financial

statement audit engagement letters requiring that the auditor include in its

report to the Center information about specific tests of compliance with

6

Section 12(c) of the John F. Kennedy Center Act Amendments of 1994, Public Law 103-279, 108 Stat.

1409, 1416 (1994), 20 U.S.C. 76r.

Page 10 GAO/GGD-97-161 Audit Duplication
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the limitation on the use of funds that it had undertaken and a statement of

the results of those tests.

In response, Center officials agreed with our suggestion to revise future

contracts and included a requirement in the fiscal year 1997 financial

statement audit contract that the auditor, in its report, include specific

information about tests conducted and the results of those tests.

Conclusion The funds appropriated to the Center for maintenance, repair, and

security, and capital projects are currently subject to duplicative audit

work. The Amendments provide that we are to review and audit the

accounts that use these appropriated funds. But because these

appropriated funds are also included in the financial statements of the

Center, they are also subject to the Center’s annual financial statement

audit.

Our discussions with Center officials and the auditor’s staff, as well as our

review of the auditor’s audit plan, documentation from the auditor’s

records, and Center documents, convinced us that our audit would have

duplicated the work of the auditor, would not have been an efficient use of

our audit resources, and would have imposed an unnecessary burden on

Center staff.

As long as Center officials continue retaining an auditor whose work is

subject to Government Auditing Standards, and Center officials require the

auditor to specifically address its tests of compliance with the limitation

on the use of appropriated funds and the results of those tests in its audit

report, we believe Congress would receive little, if any, benefit from our

duplicative audit of funds appropriated to the Center. If Congress is

concerned that the Center may not continue to retain an auditor to

perform an annual audit in compliance with the Government Auditing

Standards, it could impose a statutory requirement that the Kennedy

Center continue to have annual audits performed. Furthermore, even if the

statutory language that specifically provides for audits by the Comptroller

General of the Center’s use of appropriated funds is repealed, Congress

could still request that we review and examine the Center’s use of those

funds under our general authority in 31 U.S.C. 712.

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Recommendation We recommend that Congress delete the requirement that the Comptroller

General audit the funds appropriated. To statutorily ensure continued

audits of those funds, Congress may wish to consider including, in the

reauthorization legislation, a requirement that the Center (1) continue

contracting for annual financial statement audits, subject to the

Government Auditing Standards, to ensure that appropriated funds are

properly obligated and expended in compliance with statutory authorities

and limitations and (2) communicate the results of such audits to

Congress annually.

Agency Comments We provided copies of a draft of this report to the Chairman, John F.

Kennedy Center, for comment. On August 11, 1997, the Center’s Vice

President, Facilities; Chief Financial Officer; General Counsel; and

Controller provided us with oral comments on the draft report. These

officials advised us that they generally agreed with the information in the

report and the recommendation to Congress. They also stated that in the

Kennedy Center’s view, it is not necessary to amend the Kennedy Center

Act to specify auditing requirements because the trustees and officers

already have an obligation to ensure that expenditures of funds are

audited in accordance with current auditing standards. However, they said

that the Kennedy Center has no objection to amending the act as

recommended.

The Kennedy Center officials also provided comments to clarify some of

the information presented in the report, which we have incorporated

where appropriate.

We are sending copies of this report to the Chairman of the Senate

Subcommittee on Transportation and Infrastructure, Committee on

Environment and Public Works; the Chairman and Ranking Minority

Member of the House Subcommittee on Public Buildings and Economic

Development, Committee on Transportation and Infrastructure; the

Chairman of the John F. Kennedy Center for the Performing Arts; and

other interested committees and subcommittees. Copies will be made

available to others upon request.

Page 12 GAO/GGD-97-161 Audit Duplication
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Major contributors to this report are listed in the appendix. If you have any

questions about the report, please call me on (202) 512-8387.

Bernard L. Ungar

Director, Government Business

 Operations Issues

Page 13 GAO/GGD-97-161 Audit Duplication
Appendix 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Ronald King, Assistant Director

Thomas Johnson, Evaluator-in-Charge

Hazel Bailey, Communications Analyst

John Parulis, Senior Evaluator

Accounting

Information

Management Division

Robert Gramling, Director of Corporate Audits and Standards

Jeannette Franzel, Assistant Director, Corporate Audits and Standards

Office of the General

Counsel

Alan Belkin, Acting Associate General Counsel

Susan Michal-Smith, Senior Attorney

(240221) Page 14 GAO/GGD-97-161 Audit Duplication
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