United States General Accounting Office 

GAO Testimony 

Before the Subcommittee on Government Efficiency and 

Financial Management, Committee on Government 

Reform, House of Representatives 

For Release on Delivery


Expected at 2:00 p.m. EDT INSPECTORS GENERAL 


Wednesday, October 8, 2003


Enhancing Federal 

Accountability 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-04-117T


a
October 8, 2003 

INSPECTORS GENERAL 

Enhancing Federal Accountability 

Highlights of GAO-04-117T, a testimony 

before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

On the 25th anniversary of passage 

of the Inspector General (IG) Act, 

the Subcommittee sought GAO’s 

views on the role of the IGs in 

providing independent oversight 

within federal agencies and to 

discuss the new and continuing 

challenges faced by government 

performance and accountability 

professionals. 

In order to enhance the 

effectiveness of federal 

accountability professionals, 

Congress may wish to consider 

establishing, through statute, a 

small group of designated federal 

accountability officials, such as 

representatives from GAO and IG 

councils, to develop and implement 

a periodic strategic planning and 

ongoing coordination process for 

the manner in which GAO and IG 

work will be focused to provide 

oversight to high-risk areas and 

significant management challenges 

across government, while 

leveraging each other’s work and 

minimizing duplication. 

Congress may also want to 

consider enacting legislation 

making agencies responsible for 

paying the cost of their financial 

statement audits. 

Congress may also wish to 

consider restructuring the IGs, 

which would include elevating 

certain IGs to presidential 

appointment and consolidating 

specific IG offices where benefits 

can be shown. 

www.gao.gov/cgi-bin/getrpt?GAO-04-117T. 

To view the full product, click on the link 

above. For more information, contact 

Jeanette Franzel at (202) 512-9406 or 

franzelj@gao.gov. 

The IGs have made a significant difference in federal performance and 

accountability during the past 25 years as indicated by their reports of 

billions of dollars in savings to the public and numerous civil and 

criminal referrals. They have earned a solid reputation for preventing and 

detecting fraud and abuse; promoting improvements in government 

operations; and providing helpful analyses on a host of governmentwide 

initiatives. 

Notwithstanding the accomplishments of the past, our nation now faces 

new challenges that demand even more from government performance 

and accountability professionals. For example, we are fighting 

international terrorism while facing a large and growing structural 

deficit. In addition, recent corporate failures have shaken public 

confidence in financial reporting and accountability in the private sector. 

Federal auditors can learn important lessons from the accountability 

breakdowns in the private sector and the resulting legislation passed by 

Congress. 

Closer strategic planning and ongoing coordination of audit efforts 

between GAO and the IGs would help to enhance the effectiveness and 

impact of work performed by federal auditors. Working together and in 

our respective areas of expertise in long-term challenges and agencyspecific issues, GAO and the IGs can provide useful insights and 

constructive recommendations on a broad range of high-risk programs 

and significant management challenges across government. 

A practical issue that has arisen is who pays the cost of agency financial 

statement audits. Many IGs have told us that the cost of agency financial 

audits has taken resources away from their traditional work. In the 

private sector, the cost of financial audits is a routine business expense 

borne by the entity being audited and represents a small percentage of 

total expenditures for the audited entity. 

In a prior study, we considered the benefits of consolidating the smallest 

IG offices with those of presidentially appointed IGs and converting 

agency-appointed IGs to presidential appointment where their budgets 

were comparable. We believe that, if properly implemented, conversion 

or consolidation of IG offices could increase the overall independence, 

economy, efficiency, and effectiveness of IGs. 
Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to share my thoughts with you on the 

important role of the Inspectors General (IG), established in statute 25 

years ago this month to provide independent oversight within federal 

agencies. More significant for this discussion than the anniversary of 

landmark legislation, however, are the new and continuing challenges we 

face in assuring open, honest, effective, and accountable government and 

the critical role of the IGs, in partnership with GAO and other performance 

and accountability organizations, in addressing these challenges. 

A quarter of a century ago, Congress established statutory IGs in response 

to serious and widespread internal control breakdowns in major 

government departments and agencies, questions about integrity and 

accountability in government as a whole, and failures of oversight in the 

federal government. The IGs established by the Inspector General Act of 

1978 (IG Act) were charged with preventing and detecting fraud and abuse 

in their agencies’ programs and operations; conducting audits and 

investigations; and recommending policies to promote economy, efficiency, 

and effectiveness. The IG Act fortified the position of IG with provisions 

protecting independence, provided powers of investigation, and mandated 

reporting not just to the agency head but to Congress as well. (See app. I 

for a more detailed history of the IG Act.) 

In the years since passage of the IG Act, Congress has also enacted a series 

of laws to establish a foundation for efficient, effective, and accountable 

government. This body of legislation has given IGs new responsibilities and 

greater opportunities to play an increasing role in government oversight. 

Clearly, the IGs have made a significant difference in federal performance 

and accountability during the past 25 years as indicated by their reports of 

billions of dollars in savings to the public and thousands of 

recommendations and civil and criminal referrals. They have earned a solid 

reputation for preventing and detecting fraud, waste, and abuse; promoting 

improvements in government operations; and providing helpful analyses on 

a host of governmentwide initiatives. It is safe to say that the federal 

government is a lot better off today because of the IGs’ efforts. 

Notwithstanding the accomplishments of the past, we now face continuing 

challenges that demand even more from government performance and 

accountability professionals. For example, our nation is fighting 

international terrorism while much of the critical government 

infrastructure that we are trying to protect dates back to the 1950s. At the 

Page 1 GAO-04-117T 
same time, this nation is facing a large and growing structural deficit due 

primarily to known demographic trends and rising health care costs. 

Recent corporate failures have shaken public confidence in financial 

reporting and accountability in the private sector. In response, Congress 

passed the Sarbanes-Oxley Act of 2002, which has significant new 

requirements for publicly traded companies and their auditors. Federal 

auditors can learn important lessons from the accountability breakdowns 

in the private sector and the resulting legislation passed by Congress. 

We have achieved many important successes in working across 

organizational lines with the IGs and state and local government auditors. 

An important recent effort in building closer ties in the government 

accountability community has been the domestic working group, which I 

established in 2001 to bring together key staff from GAO, the IGs, and state 

and local audit organizations to explore issues of mutual interest and 

concern. The annual roundtable discussions and interim activities of the 

domestic working group help to focus attention on key issues and shared 

challenges facing the government audit community and allow participants 

to compare notes on methods, tools, benchmarking results, and best 

practices. In the early 1970s, GAO organized the intergovernmental audit 

forums in cooperation with federal, state, and local audit organizations. 

These forums provided the means through which new intergovernmental 

audit relationships were developed and improved the usefulness of 

auditing at each level of government. Some IGs have become active 

participants with GAO at the forums to provide a means for exchanging 

views, solving common problems, and promoting the acceptance and 

implementation of government auditing standards. Other IGs, however, 

have not been very involved in these forums and, in my view, this needs to 

change. 

In addition, we have had the active participation of many IGs and state and 

local government auditors on the Comptroller General’s Advisory Council 

on Government Auditing Standards. The Council provides advice and 

guidance on revisions to the Comptroller General’s Government Auditing 

Standards, commonly known as the “Yellow Book,” which is used by 

government auditors at the federal, state, and local levels, as well as 

contracted independent public accountants (IPA), in the audits of 

government programs and activities. It is time, however, for IGs and other 

members of the federal accountability community to build on past 

successes by putting additional focus and efforts on reaching across 

institutional lines and forming new alliances to address the complex 

challenges facing our government and our nation. 

Page 2 GAO-04-117T 
My statement today will focus on five main points: 

•	 opportunities for increasing the effectiveness of the federal 

performance and accountability community through an enhanced 

strategic partnership between the IGs and GAO, 

•	 coordination of the IG and GAO roles in agency financial statement 

audits and the audit of the U.S. government’s consolidated financial 

statements, 

• the IG role in federal financial management advisory committees, 

•	 structural streamlining within the IG community to increase resource 

efficiencies, and 

•	 matters for congressional consideration to enhance federal 

performance and accountability. 

The Need for an 

Enhanced Strategic 

Partnership between 

the IGs and GAO 

One of the challenges facing the federal performance and accountability 

community today is the need to meet increasing demands and challenges 

with our current resources. Key to this challenge is determining how GAO 

and the IGs can best complement each other and coordinate their efforts. 

The IG Act requires that the IGs coordinate with GAO to avoid duplicating 

efforts. In practice, GAO has largely devoted its efforts to program 

evaluations and policy analyses that look at programs and functions across 

government, and with a longer-term perspective; at the same time, the IGs 

have been on the front line of combating fraud, waste, and abuse within 

each agency, and their work has generally concentrated on issues of 

immediate concern with more of their resources going into uncovering 

inappropriate activities and expenditures through an emphasis on 

investigations. GAO and the IGs are, in many respects, natural partners. We 

both report our findings, conclusions, and recommendations to Congress. 

As I mentioned earlier, we share common professional audit standards 

through the Yellow Book, and I am proud to say that several current IGs 

and many of their staff are GAO alumni, including the Honorable Gaston 

Gianni, the IG of the Federal Deposit Insurance Corporation and Vice-Chair 

of the President’s Council on Integrity and Efficiency, and Barry Snyder, the 

IG of the Federal Reserve Board and Vice-Chair of the Executive Council 

on Integrity and Efficiency, who are on the panel following me today. 

Page 3 GAO-04-117T 
While GAO and the IGs make up the federal performance and 

accountability community, the division of responsibilities between them 

has not generally included, nor does the IG Act include, strategic planning 

and allocation of work across government programs based on risk and the 

relative competitive advantages of each organization. Traditionally, GAO 

and IG coordination has been applied on an ad-hoc, job-by-job or issue-byissue basis. We now have both the need and the opportunity to enhance the 

effectiveness of federal oversight through more strategic and ongoing 

coordination of efforts between GAO and the IGs in the following areas: 

• addressing major management challenges and program risks, 

•	 monitoring the top challenges the government faces, such as 

implementation of the President’s Management Agenda, and 

•	 conducting the audit of the government’s consolidated financial 

statements. 

Later in this testimony, I am suggesting that Congress consider 

establishing, through statute, assignment of responsibility to a select group 

of designated federal accountability and performance professionals to 

engage in a formal, periodic strategic planning and ongoing engagement 

coordination process to focus federal audit efforts across the federal 

government. This process would be in addition to, and would not replace, 

the current coordination of information sharing and technical cooperation 

being implemented by the domestic working group, the audit forums, and 

the President’s Council on Integrity and Efficiency (PCIE) and the 

Executive Council on Integrity and Efficiency (ECIE).1 

Major Management GAO’s latest high-risk report,2 released in January 2003, highlights areas 

Challenges and Program across government that are at risk either due to their high vulnerability to 

Risks waste, fraud, abuse, and mismanagement, or as major challenges 

associated with the economy, efficiency, and effectiveness of federal 

programs, policies, processes, functions, or activities. Many of the high-risk 

1

These councils were established by Executive Order and are described later in this 

testimony. 

2

U.S. General Accounting Office, High Risk Series: An Update, GAO-03-119 (Washington, 

D.C.: January 2003). 

Page 4 GAO-04-117T 
areas we identified involve essential government services, such as 

Medicare and mail delivery, that directly affect the well-being of the 

American people. Although some agencies have made strong efforts to 

address the deficiencies cited in the high-risk reports—and some of the 

programs included on GAO’s initial high-risk list in 1990 have improved 

enough to warrant removal—we continue to identify many other areas of 

high risk. Greater strategic coordination between GAO and the IGs on a 

plan for monitoring and evaluating high-risk issues and keeping the 

pressure high to reduce the risk of these programs is not only desirable, it 

is essential if we are to reduce the risk of key government programs. 

At the request of Congress, the IGs annually report issues similar to those 

in GAO’s high-risk report identifying the “Top Management Challenges” 

facing their agencies. In fiscal year 2002, the IGs ranked information 

technology, financial management, and human capital management among 

the most important challenges confronting their agencies governmentwide; 

other priorities included performance management, public health and 

safety, and grants management. Each of these areas closely corresponds to 

an area on GAO’s high-risk list. 

Although both GAO and the IGs have efforts in place to identify major risks 

and challenges within government, there is no mechanism in place to carry 

out an integrated, strategic planning process as a means through which 

these issues will be monitored and evaluated in the future through 

combined and coordinated GAO and IG oversight. 

President’s Management 

Agenda 

The administration has signaled its commitment to government 

transformation with the President’s Management Agenda (PMA), which 

targets 14 of the most glaring problem areas in government for immediate 

action. Five areas—strategic human capital, budget and performance 

integration, improved financial performance, expanded electronic 

government, and competitive sourcing—are governmentwide in scope, 

while 9 are agency specific. Each area has the potential for dramatic 

improvement and concrete results. The areas also reflect many of the 

concerns raised by both GAO’s high-risk report and the IGs’ top 

management challenge lists. So far, however, progress on PMA has been 

uneven. To achieve consistent progress, sustained attention from Congress, 

the administration, and the agencies is needed. I believe that GAO and the 

IGs can make important contributions, using our combined experience, to 

help monitor the implementation of this important initiative. 

Page 5 GAO-04-117T 
Key policymakers increasingly need to think beyond quick fixes and 

carefully consider what the proper role of the federal government should 

be in the 21st century. Members of Congress and agency heads can start by 

undertaking a top-to-bottom review of federal programs and policies to 

determine which should remain priorities, which should be overhauled, 

and which have outlived their usefulness or are just no longer affordable 

given more pressing demands. Everything that forms the government’s 

base must be on the table, including tax, spending, and regulatory policies. 

Policymakers will need to distinguish “wants,” which are optional, from 

“needs,” which can be urgent. They need to make hard choices that take 

into account what the American people will support and what the federal 

government can afford and sustain over time. To make informed decisions, 

Congress and agency heads will require hard facts and professional 

analyses that are objective, fact based, timely, accurate, nonpartisan, fair, 

and balanced. GAO and the IGs are important sources of such objective 

information and analyses. 

With our respective areas of expertise in long-term challenges and agencyspecific issues, GAO and the IGs can provide useful insights and 

constructive recommendations on programs that may warrant additional 

resources, consolidation, revision, or even elimination. Closer periodic 

strategic planning and ongoing engagement coordination between GAO 

and the IGs would help to ensure continued effective oversight of these key 

issues facing government. 

Audit of the U.S. 

Government’s Consolidated 

Financial Statements 

GAO and the IGs are already partners in one of the most far-reaching 

financial management initiatives in government—the yearly audits of the 

federal government’s consolidated financial statements. Under the Chief 

Financial Officers (CFO) Act of 1990 as expanded by the Government 

Management Reform Act of 1994, the IGs at the 24 agencies3 named in the 

CFO Act are responsible for the audits of their agencies’ financial 

statements. In meeting these responsibilities, most IGs have contracted 

with IPAs to conduct the audits either entirely or in part. GAO is 

responsible for the U.S. government’s consolidated financial statements 

3

The Federal Emergency Management Agency (FEMA), one of 24 agencies named in the 

CFO Act, was transferred to the new Department of Homeland Security (DHS), effective 

March 1, 2003. With the transfer, FEMA will no longer be required to prepare audited standalone financial statements under the CFO Act. Consideration is now being given to making 

DHS a CFO Act agency, which would bring the number of CFO Act agencies back up to 24. 

Page 6 GAO-04-117T 
audit, which by necessity is based largely on the results of the IGs’ agencylevel audits. 

Since 1997, GAO has been unable to give an opinion on the consolidated 

financial statements, in large part because of continuing financial 

management problems at several agencies that also have resulted in 

disclaimers of opinion by some IGs on their agency financial statements— 

most notably the Department of Defense (DOD). In recent years, we have 

seen progress in the results of the audits of the CFO Act agency financial 

statements with more and more IGs and their contracted IPAs moving from 

issuing a disclaimer of opinion to issuing an unqualified (“clean”) opinion 

on their respective agency financial statements. In fact, 21 of the 24 CFO 

Act agencies received an unqualified opinion on their fiscal year 2002 

financial statements, up from only 6 agencies for fiscal year 1996. We 

anticipate that if sufficient progress continues to be made, there is a chance 

that we may be able to render a qualified opinion on the consolidated 

balance sheet in a few years as a first step toward rendering an opinion on 

the full set of financial statements. 

Our reviews of the work done by other IGs and IPAs on agency-level 

financial statement audits during the last 2 years identified opportunities 

for improvement in sampling, audit documentation, audit testing, analytical 

procedures, and auditing liabilities. The varying quality of the audit work 

has been of concern to us because of our need to use the work of the 

agency auditors to support expressing an opinion on the U.S. government’s 

consolidated financial statements—an opinion for which, in the final 

analysis, GAO is solely responsible and accountable. 

Earlier involvement and access by GAO in the agency-level financial 

statement audits would help to strengthen the IG and IPA audit process and 

bolster our ability to use their work in rendering an opinion. At a minimum, 

GAO needs to (1) be involved up front in the planning phase of each 

agency-level audit, (2) have unrestricted access to IG and IPA audit 

documentation and personnel throughout the performance of the audit, 

(3) receive assurances that each agency-level audit is planned, performed, 

and reported in conformity with the Financial Audit Manual (FAM) 

developed jointly and adopted by GAO and the PCIE, and (4) be notified in 

advance of any planned deviation from the FAM’s requirements that could 

affect GAO’s ability to use the agency auditors’ work. 

At one agency (Department of Energy), for the selected areas we reviewed, 

we found that the audit work was performed in conformity with the FAM 

Page 7 GAO-04-117T 
and that we would have been able to use the work without having to 

perform additional audit procedures. The IG has an oversight team 

composed of senior-level staff who perform moderate-level quality control 

reviews of the contracted IPA’s work throughout the audit process. The 

oversight team evaluates its IPA in areas such as audit planning and 

execution, audit documentation, and staff qualifications. These types of 

practices could be shared and expanded upon across the IG community. As 

an initial step to make the IG and IPA audit process stronger and enhance 

GAO’s ability to use their work in rendering an opinion, we are considering 

holding a forum with the IGs and the IPAs to share information—based on 

GAO’s review of the IG and IPA work—regarding best practices and areas 

to focus on that need additional audit work, and to establish a framework 

for enhanced coordination of the financial statement audit work. 

Changes to enhance the agency financial statement audit process are 

especially important given the planned acceleration of reporting deadlines 

for agency audits. Although some agencies accelerated their reports for 

fiscal year 2002, starting with fiscal year 2004, the Office of Management 

and Budget (OMB) has required that agencies issue their audited financial 

statements no later than 45 days after the end of the fiscal year, with the 

consolidated financial statements to be issued 30 days later. In past years, 

when the reporting deadlines were 4 and 5 months after the end of the 

fiscal year, agencies made extraordinary efforts in which they spent 

considerable resources on extensive ad hoc procedures and made 

adjustments of billions of dollars to produce financial statements months 

after the fiscal year had ended. Given the accelerated reporting dates, such 

extraordinary approaches will no longer be an option. Over the next few 

years, as the government addresses the impediments to receiving an 

opinion on its consolidated financial statements, and we move closer to 

being able to render an opinion on the consolidated financial statements, 

GAO will need to invest more resources in assuring that the work of the IGs 

and IPAs on the agency-level financial statement audits can be used by 

GAO to support the audit of the consolidated financial statements. This 

resource investment is necessary if GAO is to be able to render an opinion 

on the consolidated financial statements. 

Another matter of concern regarding the audit of the U.S. government’s 

consolidated financial statements involves the approaches used by the IGs 

and IPAs for reporting on internal control at the agency level. Our position 

is that an opinion on internal control is important in the government 

environment and that the public should be able to expect audit assurance 

on the adequacy of internal control over financial reporting. We believe that 

Page 8 GAO-04-117T 
auditor opinions on internal control are a critical component of monitoring 

the effectiveness of an entity’s risk management and accountability 

systems. We also believe that auditor opinions on internal control are 

appropriate and necessary for major public entities such as the CFO Act 

agencies currently included in the U.S. government’s consolidated financial 

statements. 

As does GAO in connection with our own audits, several agency auditors 

are voluntarily providing opinions on the agencies’ internal control; but 

most do not. When an auditor renders an opinion on internal control, the 

auditor is providing reasonable assurance that the entity has maintained 

effective internal control over financial reporting (including safeguarding 

of assets) and compliance such that material misstatements, losses, or 

noncompliance that are material to the financial statements would be 

detected in a timely fashion. For fiscal year 2002, however, only 3 of the 24 

CFO Act agencies received opinions on internal control from their 

auditors.4

 The remaining 21 reported on internal control, but provided no 

opinion on the effectiveness of the agency’s internal control. As we move 

closer to being able to issue an opinion on the consolidated financial 

statements, a disparity in reporting on internal control would hinder our 

ability to provide an opinion on internal control for the consolidated audit. 

Current agency-level reporting on internal control would fall short of what 

the public should be able to expect from an audit and, moreover, what is 

now legally required from the auditors of publicly traded companies. 

Congress has prescribed auditor opinions on internal controls for publicly 

traded corporations under the Sarbanes-Oxley Act of 2002.5

 A final rule 

issued by the Securities and Exchange Commission in June 2003 and 

effective August 2003 provides guidance for implementation of section 404 

of the act, which contains requirements for management and auditor 

reporting on internal controls. The final rule requires companies to obtain a 

report in which a registered public accounting firm expresses an opinion, 

or states that an opinion cannot be expressed, concerning management’s 

assessment of the effectiveness of internal controls over financial 

reporting. 

4

The three agencies receiving opinions on internal control for fiscal year 2002 are the Social 

Security Administration, General Services Administration, and Nuclear Regulatory 

Commission. 

5

Pub. L. No. 107-204, 116 Stat. 745 (2002). 

Page 9 GAO-04-117T 
As you know, Mr. Chairman, we provided testimony before this 

Subcommittee several weeks ago on the challenges of establishing sound 

financial management within DHS.6

 In that testimony, we supported 

provisions of H.R. 2886 that would require DHS to obtain an audit opinion 

on its internal controls. During the testimony, we also supported provisions 

of H.R. 2886 that would require the Chief Financial Officers Council and the 

PCIE to jointly study the potential costs and benefits of requiring CFO Act 

agencies to obtain audit opinions of their internal controls over financial 

reporting. In addition, the current version of H.R. 2886 would require GAO 

to perform an analysis of the information provided in the report and report 

the findings to the House Committee on Government Reform and the 

Senate Committee on Governmental Affairs. We believe that the study and 

related analysis are important first steps in resolving the issues associated 

with the current reporting on internal control. 

Ultimately, we are hopeful that federal performance and accountability 

professionals will not settle for anything less than opinion-level work on 

internal control at the CFO Act agency level and on the governmentwide 

audit. Increased planning and coordination will be needed among GAO, 

IGs, and IPAs to determine the appropriate timing for requiring an opinion 

on controls at the agency level. The specific timing will depend on the 

current state of the agency’s control efforts so that an audit opinion on 

internal control would add value and mitigate risk in a cost beneficial 

manner. 

A practical issue that should also be dealt with is the adequacy of resources 

to provide for the agency financial statement audits. Over the years, a 

number of IGs have told us that the cost of agency financial audits has 

taken resources away from their traditional work. In the private sector, the 

cost of an annual financial audit is a routine business expense borne by the 

entity being audited, and the cost of the audit represents a very small 

percentage of total expenditures for the audited entity. We support enacting 

legislation that would make agencies responsible for paying the cost of 

their financial statement audits. We also believe that an arrangement in 

which the agencies pay for their own audits provides them with positive 

incentives for taking actions—such as streamlining systems and cleaning 

up their financial records prior to the audit—in order to reduce the costs of 

6

U.S. General Accounting Office, Department of Homeland Security: Challenges and Steps 

in Establishing Sound Financial Management, GAO-03-1134T (Washington, D.C.: Sept. 10, 

2003). 

Page 10 GAO-04-117T 
the audit and avoid the “heroic” audit efforts that we have seen in the past 

at some agencies. 

Under the arrangement in which agencies pay the cost of their own audits, 

we believe the IG should continue in the current role of selecting and 

overseeing audits in those cases in which the IG does not perform the audit 

but hires an IPA to conduct the audit. This would leverage the IGs’ 

expertise to help assure the quality of the audits. We also advocate an 

approach whereby the IGs would be required to consult with the 

Comptroller General during the IPA selection process to obtain input from 

the results of GAO’s reviews of the IPAs’ previous work and the potential 

impact on the consolidated audit. 

The IG Role in Federal 

Financial Management 

Advisory Committees 

We envision an important role for the IGs in audit or financial management 

advisory committees established at the federal agency level for the purpose 

of overseeing an agency’s financial management, audits, and performance. 

In the government arena, some state and local governments and federal 

government corporations, as well as several federal agencies, have adopted 

an audit committee, or “financial management advisory committee,” 

approach to governance. In the federal government, such audit committees 

or advisory committees are intended to protect the public interest by 

promoting and facilitating effective accountability and financial 

management by providing independent, objective, and experienced advice 

and counsel, including oversight of audit and internal control issues. 

Responsibilities of the committees would likely include communicating 

with the auditors about the audit and any related issues. The work of the 

IGs logically provides much of the basis for financial management advisory 

committees in overseeing agencies’ financial management, audits, and 

internal control. The work of the IGs would also be critical for the financial 

management advisory committees in their general governance roles. 

Specific roles and responsibilities of the committees will most likely vary 

by agency. A recently published guide, Financial Management Advisory 

Committees for Federal Agencies,

7 provides a helpful road map of 

suggested practices for federal agency financial management advisory 

committees. 

7

Financial Management Advisory Committees for Federal Agencies: Suggested Practices, 

March 2003, prepared by KPMG, LLP. 

Page 11 GAO-04-117T 
The concept of financial management advisory committees is very similar 

to the audit committee structure being used in the private sector. To help 

facilitate the audit process and promote disclosure and transparency, the 

governing boards of publicly traded companies use audit committees. 

Audit committees generally oversee the independent audit of the 

organization’s financial statements and address financial management, 

reporting, and internal control issues. The Sarbanes-Oxley Act has 

requirements for the audit committees of publicly traded companies and 

their auditors regarding communications and resolution of significant audit 

matters. 

We strongly support the implementation of financial management advisory 

committees for selected federal agencies, based on risk and value added. 

Some agencies,8

 including GAO, which has had such a committee in place 

since 1995, have already implemented such an approach, even though the 

committees have not been mandated or established by statute. As these 

committees are implemented or required in government, we would 

advocate amending the IG Act to emphasize the IGs’ unique role in 

reporting the results of their work to the advisory committees while 

maintaining their independence and dual reporting authority to Congress. 

Structural Streamlining 

to Increase Resource 

Efficiencies 

One of the issues facing the IG community as well as others in the 

performance and accountability community is how to use limited resources 

to the best effect. In fiscal year 2002, the 57 IG offices operated with total 

fiscal year budgets of about $1.6 billion and about 11,000 staff. (See app. II 

for more detail on IG budgets and staffs.) Most IGs for cabinet departments 

and major agencies are appointed by the President and confirmed by the 

Senate; however, IGs for some agencies are appointed by the agency head, 

and these IGs generally have smaller budgets and fewer staff than IGs 

appointed by the President. While agency-appointed IGs make up about 

half of all IG offices, the total of their fiscal year 2002 budgets was $162.2 

million, a little more than 10 percent of all IG budgets. Of these IGs, the 

offices at the U.S. Postal Service (USPS), Amtrak, National Science 

Foundation (NSF), and Federal Reserve Board (FRB) are exceptions and 

have budgets that are comparable in size to those of presidentially 

appointed IGs. The remaining 24 agency-appointed IGs have a total of 191 

8

Agencies that currently have audit committees or financial management advisory 

committees include the National Science Foundation, Federal Deposit Insurance 

Corporation, and the Architect of the Capitol. 

Page 12 GAO-04-117T 
staff and have budgets that make up about 2 percent of all IG budgets. 

Importantly, 16 of the 28 agency-appointed IGs have fewer than 10 staff. 

Potential IG Office 

Consolidations 

Last year we reported the views of the IGs, as well as our own, on the 

possible benefits of consolidating the smallest IG offices with the offices of 

IGs appointed by the President.9 We also considered the conversion of 

agency-appointed IGs to presidential appointment where their budgets 

were comparable to the presidentially appointed IG offices. The August 

2002 report contains several matters for congressional consideration to 

address issues of IG conversion and consolidation. We are reaffirming 

these views, which are included at the end of my statement. 

We believe that if properly structured and implemented, the conversion or 

consolidation of IG offices could increase the overall independence, 

efficiency, and effectiveness of the IG community. Consolidation could 

provide for a more effective and efficient allocation of IG resources across 

government to address high-risk and priority areas. It would not only 

achieve potential economies of scale but also provide a critical mass of 

skills, particularly given advancing technology and the ever-increasing need 

for technical staff with specialized skills. This point is especially 

appropriate to the 12 IG offices with five or fewer staff. IG staff now in 

smaller offices would, in a large, consolidated IG office, have immediate 

access to a broader range of resources to use in dealing with issues 

requiring technical expertise or areas of critical need. 

Consolidation would also strengthen the ability of IGs to improve the 

allocation of human capital and scarce financial resources within their 

offices and to attract and retain a workforce with talents, multidisciplinary 

knowledge, and up-to-date skills to ensure that each IG office is equipped 

to achieve its mission. Consolidation would also increase the ability of 

larger IG offices to provide methods and systems of quality control in the 

smaller agencies. 

We also recognize that there are potential risks resulting from 

consolidation that would have to be mitigated through proactive and 

targeted actions in order for the benefits of consolidation to be realized 

without adversely affecting the audit coverage of small agencies. For 

9

U.S. General Accounting Office, Inspectors General: Office Consolidation and Related 

Issues, GAO-02-575 (Washington, D.C.: August 2002). 

Page 13 GAO-04-117T 
example, the potential lack of day-to-day contact between the IG and 

officials at smaller agencies as a result of consolidation could be mitigated 

by posting IG staff at the agency to keep both the IG and the agency head 

informed and to coordinate necessary meetings. In preparation for 

consolidation, staff in the smaller IG offices could be consulted in planning 

oversight procedures and audit coverage for their agencies. There may be 

fewer audits or even less coverage of those issues currently audited by the 

IGs at smaller agencies, but coverage by a consolidated IG could address 

areas of higher risk, value, and priority, resulting in potentially more 

efficient and effective use of IG resources across the government. 

Results of the survey conducted for our August 2002 report indicate a clear 

delineation between the responses of the presidentially appointed IGs and 

the responses of the agency-appointed IGs. The presidentially appointed 

IGs generally indicated that agency-appointed IG independence, quality, 

and use of resources could be strengthened by conversion and 

consolidation. The agency-appointed IGs indicated that there would either 

be no impact or that these elements could be weakened. The difference in 

views is not surprising given the difference in the potential impact of 

consolidation on the interests of the two groups of IGs. We believe that this 

difference in perspective, more than any other factor, helps to explain the 

significant divergence in the responses to the survey. 

There are already some examples where consolidation of IG offices and 

oversight is working. The Department of State IG provides, through statute, 

oversight of the Broadcasting Board of Governors and the International 

Broadcasting Bureau. The IG at the Agency for International Development 

is authorized by specific statutes to provide oversight of the Overseas 

Private Investment Corporation, the Inter-American Foundation, and the 

African Development Foundation. 

In terms of budget size, the agency-appointed IGs at USPS, Amtrak, NSF, 

and FRB are comparable to the offices of IGs appointed by the President. 

Moreover, in the case of the Postal IG, the office is the fourth largest of all 

the IGs. (See app. II.) On that basis, these IGs could be considered for 

conversion to appointment by the President with Senate confirmation. 

While the Amtrak IG could be converted because of comparable budget 

size, oversight of Amtrak is closely related to the work of the Department 

of Transportation IG. Moreover, the Transportation IG currently provides 

some oversight of Amtrak programs. Therefore, the consolidation of the 

Amtrak IG with the Transportation IG could be considered, rather than 

conversion. 

Page 14 GAO-04-117T 
Consideration has been given in the Fiscal Year 2004 Budget of the U.S. 

Government to the consolidation of the two IG offices at the Department of 

the Treasury, unique in the federal government. The original statutory IG 

for the Department of the Treasury was established by the IG Act 

amendments of 1988. The Treasury IG for Tax Administration was 

established in 1998 as part of an Internal Revenue Service (IRS) 

reorganization because the former IRS Inspection Service was not 

perceived as being sufficiently independent from management. 

Consequently, the IRS Office of the Chief Inspector, along with most of the 

Inspection Service staff, was transferred to the new IG office to ensure 

independent reviews. 

The separate office of Treasury IG for Tax Administration was created 

because IRS officials were concerned that if the resources of the IRS 

Inspection Service were transferred to the original Treasury IG office, they 

would be used to investigate or audit other Treasury bureaus to the 

detriment of critical IRS oversight. With the passage of the Homeland 

Security Act of 2002, and the transfer of Treasury’s United States Customs 

Service and United States Secret Service to the new Department of 

Homeland Security, the original concerns about competition for resources 

within the department should no longer be as compelling. 

IG Councils	 The PCIE is an interagency council comprising principally the 

presidentially appointed and Senate-confirmed IGs. It was established by 

Executive Order No.12301 in 1981 to coordinate and enhance the work of 

the IGs. In 1992, Executive Order No.12805 created the ECIE, which 

comprises primarily statutory IGs appointed by the heads of designated 

federal entities as defined in the IG Act. The Deputy Director for 

Management in OMB serves as the chair of both organizations. These IG 

councils have been effective in coordinating the activities of the IGs in their 

efforts to prevent and detect fraud, waste, and abuse throughout the 

federal government and in reporting these results to both the President and 

Congress. 

The IG councils have provided a valuable forum for auditor coordination. 

However, we believe that the current environment demands a more formal, 

action-oriented, and strategic approach for coordination among federal 

audit organizations and that the IG councils could be strengthened in a 

number of ways. First, by providing a statutory basis for their roles and 

responsibilities, the permanence of the councils could be established and 

their ability to take on more sensitive issues strengthened. In addition, the 

Page 15 GAO-04-117T 
strategic focus of the councils could be clearly established. As such, the 

councils would also be key in the overall strategic planning process for 

federal audit oversight that I described earlier in this statement. 

Matters for 

Congressional 

Consideration 

As I stated at the beginning of my testimony, IGs have made a significant 

difference in federal performance and accountability during the last quarter 

century. The 25th anniversary of the landmark legislation establishing the 

IGs is an opportune time to reflect on the IGs’ success while also 

considering ways to enhance coordination and utilization of resources 

across the federal performance and accountability community. 

In order to enhance the effectiveness and impact of the federal 

accountability community, Congress may want to consider establishing, 

through statute, assignment of responsibility to a selected group of 

designated federal accountability officials, such as representatives from 

GAO, the PCIE, and the ECIE, to develop and implement a periodic, formal 

strategic planning and ongoing engagement coordination process for 

focusing GAO and IG work to provide oversight to high-risk areas and 

significant management challenges across government, while leveraging 

each other’s work and minimizing duplication. 

In order to resolve resource issues and provide positive incentives to 

agencies to take prudent actions to reduce overall audit costs, Congress 

may want to consider enacting legislation that makes agencies responsible 

for paying the cost of their financial statement audits. 

In order to achieve potential efficiencies and increased effectiveness 

across the federal IG community, Congress may also want to consider 

whether to proceed with a restructuring of the IG community, which could 

include the following: 

•	 amending the IG Act to elevate the IGs at USPS, NSF, and FRB to 

presidential status, 

•	 amending the IG Act to consolidate agency-appointed IGs with 

presidentially appointed IGs based on related agency missions or where 

potential benefits to IG effectiveness can be shown, and 

•	 establishing an IG council by statute that includes stated roles and 

responsibilities and designated funding sources. 

Page 16 GAO-04-117T 
Mr. Chairman, that concludes my prepared statement. I would be happy to 

respond to any questions you or Members of the Subcommittee might have. 

Page 17 GAO-04-117T 
Appendix I 

The Inspector General Act


The Inspector General Act of 1978 was enacted following a series of events 

that emphasized the need for more-independent and coordinated audits 

and investigations in federal departments and agencies. First, in 1974, the 

Secretary of Agriculture abolished the department’s administratively 

established IG office, demonstrating the impermanent nature of a 

nonstatutory IG. Later, in 1974 and 1975, a study by the Intergovernmental 

Relations and Human Resources Subcommittee of the House Government 

Operations Committee disclosed inadequacies in the internal audit and 

investigative procedures in the Department of Health, Education, and 

Welfare, now the Department of Health and Human Services. The need to 

deal more effectively with the danger of loss from fraud and abuse in the 

department’s programs led to the establishment of the first statutory IG in 

1976. The Congress also established an IG in the Department of Energy 

when that department was created in 1977. 

In 1977, the House Intergovernmental Relations and Human Resources 

Subcommittee began a comprehensive inquiry to determine whether other 

federal departments and agencies had a similar need for statutory IGs. The 

Subcommittee’s study revealed serious deficiencies in a number of 

department and agency audit and investigative efforts, including the 

following: 

• No central leadership of auditors and investigators existed. 

•	 Auditors and investigators exhibited a lack of independence by 

reporting to officials who had responsibility for programs that were 

being audited. 

•	 No procedures had been established to ensure that the Congress was 

informed of serious problems. 

• No program existed to look for possible fraud or abuse. 

As an initial effort to correct these deficiencies, the IG Act of 1978 

established 12 additional statutory OIGs to be patterned after the one at the 

Department of Health, Education, and Welfare. The act consolidated the 

audit and investigative responsibilities of each department and agency 

under the direction of one senior official—the Inspector General—who 

reports to the head of the agency or, if delegated, the official next in rank 

below the agency head. The President appoints the IGs, by and with the 

consent of the Senate, without regard to political affiliation and solely on 

the basis of integrity and demonstrated ability in accounting, financial 

Page 18 GAO-04-117T 
Appendix I


The Inspector General Act


analysis, law, management analysis, public administration, or 

investigations. 

The IGs are responsible for (1) conducting and supervising audits and 

investigations, (2) providing leadership and coordination and 

recommending policies to promote economy, efficiency, and effectiveness, 

and (3) detecting fraud and abuse in their agencies’ programs and 

operations. In addition, the IG Act requires IGs to prepare semiannual 

reports which summarize the activities of the IG during the preceding 6-

month period. The reports are forwarded to the department or agency 

head, who is responsible for transmitting them to the appropriate 

congressional committees. 

The act states that neither the agency head nor the official next in rank 

shall prevent or prohibit the IG from initiating, carrying out, or completing 

any audit or investigation, or from issuing any subpoena during the course 

of any audit or investigation. This enhances the independence of auditors 

and investigators by ensuring that they are free to carry out their work 

unobstructed by agency officials. The act further enhances independence 

by requiring IGs to comply with the Comptroller General’s Government 

Auditing Standards. One of these standards requires auditors and audit 

organizations to be personally and organizationally independent and to 

maintain the appearance of independence so that opinions, conclusions, 

judgments, and recommendations will be impartial and will be viewed as 

such by knowledgeable third parties. 

Between the enactment of the IG Act in 1978 and 1988, the Congress passed 

legislation to establish statutory IGs, who are appointed by the President 

with Senate confirmation, in 8 additional departments and agencies. In 

1988, the Congress enacted the Inspector General Act Amendments of 1988 

and the Government Printing Office (GPO) Inspector General Act of 1988 

(Titles I and II, Public Law 100-504) to establish additional presidentially 

appointed IGs in 5 departments and agencies and 34 IGs appointed by their 

agency heads (33 in designated federal entities and 1 in GPO) in order to 

strengthen the capability of the existing internal audit offices and improve 

audit oversight. Both GAO and the President’s Council on Integrity and 

Efficiency (PCIE) had previously reported that the existing internal audit 

offices lacked independence, adequate coverage of important programs, 

and permanent investigative staff. 

Page 19 GAO-04-117T 
Appendix II 

Inspector General Budgets and Staffing


Table 1: Inspectors General Appointed by the President, Fiscal Year 2002 Budgets 

and Full-Time Equivalents (FTEs) 

Federal departments/agencies Budgets FTEs 

1 Department of Health and Human Servicesa $227,000,000 1,569 

2 Department of Defense 151,000,000 1,215 

3 Treasury IG for Tax Administration 130,000,000 

4 Department of Housing and Urban Development 95,000,000 

5 Social Security Administration 75,000,000 

6 Department of Agriculture 75,000,000 

7 Department of Labor 67,000,000 

8 Department of Justice 65,000,000 

9 Department of Veterans Affairs 57,000,000 

10 Department of Transportation 50,000,000 

11 Department of Homeland Security 47,000,000 

12 Environmental Protection Agency 46,000,000 

13 Department of Education 39,000,000 

14 Department of the Interior 37,000,000 

15 General Services Administration 36,000,000 

16 Department of Energy 32,000,000 250


17 Agency for International Development 32,000,000 166


18 Federal Deposit Insurance Corporation 32,000,000 201


19 Department of State 29,000,000 234


20 National Aeronautics and Space Administration 24,000,000 200


21 Department of Commerce 21,000,000 136


22 Small Business Administration 12,000,000 108


23 Department of the Treasury 12,000,000 87


24 Office of Personnel Management 11,000,000 89


25 Tennessee Valley Authority 7,000,000 87


26 Nuclear Regulatory Commission 6,000,000 41


27 Railroad Retirement Board 6,000,000 51


28 Corporation for National and Community Service 5,000,000 16


29 Central Intelligence Agencyb na na


Total $1,426,000,000 10,429


Source: Budget authority and FTEs from Fiscal Year 2004 Budget of the U.S. Government.


a

Includes budget authority to combat health care fraud.


b

Budget and FTE information not available.


Page 20 GAO-04-117T 

943 

648 

564 

642 

426 

329 

393 

454 

336 

444 

276 

251 

273 
Appendix II


Inspector General Budgets and Staffing


Table 2: Inspectors General Appointed by Agency Heads, Fiscal Year 2002 Budgets 

and Full-Time Equivalents (FTEs) 

Federal agencies Budgets FTEs 

U.S. Postal Service $117,324,000 713 

2 Amtrak 8,706,539 64 

3 National Science Foundation 6,760,000 50 

4 Federal Reserve Board 3,878,000 29 

5 Government Printing Office 3,400,000 24 

6 Legal Services Corporation 2,500,000 15 

7 Peace Corps 2,006,000 16 

8 Smithsonian Institution 1,800,000 17 

9 Federal Communications Commission 1,569,000 10 

10 National Archives and Records Administration 1,375,000 13 

11 Securities and Exchange Commission 1,372,559 8 

12 National Credit Union Administration 1,338,135 7 

13 Pension Benefit Guaranty Corporation 1,300,000 11 

14 Equal Employment Opportunity Commission 1,106,119 10 

15 Federal Housing Finance Board 858,237 3 

16 Farm Credit Administration 829,621 5 

17 Commodity Futures Trading Commission 735,800 4 

18 Corporation for Public Broadcasting 735,000 9 

19 National Labor Relations Board 711,900 6 

20 Federal Trade Commission 710,000 5 

21 National Endowment for the Humanities 497,000 5 

22 Appalachian Regional Commission 466,000 3 

23 Federal Maritime Commission 441,034 3 

24 Consumer Product Safety Commission 407,000 3 

25 Federal Election Commission 392,600 4 

26 National Endowment for the Arts 392,577 4 

27 International Trade Commission 389,500 4 

28 Federal Labor Relations Authority 222,500 2 

Total $162,224,121 1,047 

Source: As reported by the ECIE. 

Page 21 GAO-04-117T 

1 
Appendix II


Inspector General Budgets and Staffing


Table 3: Inspectors General Appointed by the President with Four Comparable 

Agency-Appointed IGs Fiscal Year 2002 Budgets 

Fiscal year 

Department/agency IG 2002 budgets 

Department of Health and Human Servicesa $227,000,000 

Department of Defense 151,000,000 

Treasury's IG for Tax Administration 130,000,000 

U.S. Postal Serviceb 117,324,000 

Department of Housing and Urban Development 95,000,000 

Department of Agriculture 75,000,000 

Social Security Administration 75,000,000 

Department of Labor 67,000,000 

Department of Justice 65,000,000 

10 Department of Veterans Affairs 57,000,000 

11 Department of Transportation 50,000,000 

12 Department of Homeland Security 47,000,000 

13 Environmental Protection Agency 46,000,000 

14 Department of Education 39,000,000 

15 Department of the Interior 37,000,000 

16 General Services Administration 36,000,000 

17 Department of Energy 32,000,000 

18 Agency for International Development 32,000,000 

19 Federal Deposit Insurance Corporation 32,000,000 

20 Department of State 29,000,000 

21 National Aeronautics and Space Administration 24,000,000 

22 Department of Commerce 21,000,000 

23 Department of the Treasury 12,000,000 

24 Small Business Administration 12,000,000 

25 Office of Personnel Management 11,000,000 

26 Amtrakb 8,706,539 

27 Tennessee Valley Authority 7,000,000 

28 National Science Foundationb 6,760,000 

29 Nuclear Regulatory Commission 6,000,000 

30 Railroad Retirement Board 6,000,000 

31 Corporation for National and Community Service 5,000,000 

32 Federal Reserve Board b 3,878,000 

33 Central Intelligence Agency c na 

Total $1,562,668,539 

Source: Budget authority from Fiscal Year 2004 Budget of the U.S. Government. 

Page 22 GAO-04-117T 

1 

2 

3 

4 

5 

6 

7 

8 

9 
Appendix II


Inspector General Budgets and Staffing


Note: The four comparable agency appointed IGs are in bold.


a

Includes budget authority to combat health care fraud. 


b

Information supplied by the ECIE.


c

Budget information not available.


(194355) Page 23 GAO-04-117T 
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