Inspectors General: Enhancing Federal Accountability
Published: 2003-10-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: On the 25th anniversary of passage of the Inspector General (IG) Act, Congress 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.
section_title: What GAO Found
paragraphs: 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 agency-specific 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.

section_title: Letter
paragraphs: 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  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.
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 matters for congressional consideration to enhance federal  performance and accountability.
subsections: section_title: The Need for an Enhanced Strategic Partnership between the IGs and GAO
paragraphs: 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.
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-by- issue 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).
subsections: section_title: Major Management Challenges and Program Risks
paragraphs: GAO’s latest high-risk report,released in January 2003, highlights areas  across government that are at risk either due to their high vulnerability to  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  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.
section_title: President’s Management Agenda
paragraphs: 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.
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 agency- specific 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.
section_title: Audit of the U.S. Government’s Consolidated Financial Statements
paragraphs: 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 agencies 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  audit, which by necessity is based largely on the results of the IGs’ agency- level 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  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  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. 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. 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.
As you know, Mr. Chairman, we provided testimony before this  Subcommittee several weeks ago on the challenges of establishing sound  financial management within DHS. 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  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.
section_title: The IG Role in Federal Financial Management Advisory Committees
paragraphs: 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,provides a helpful road map of  suggested practices for federal agency financial management advisory  committees.
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, 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.
section_title: Structural Streamlining to Increase Resource Efficiencies
paragraphs: 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  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.
subsections: section_title: Potential IG Office Consolidations
paragraphs: 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. 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  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.
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.
section_title: IG Councils
paragraphs: 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  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.
section_title: Matters for Congressional Consideration
paragraphs: 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 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.
Mr. Chairman, that concludes my prepared statement. I would be happy to  respond to any questions you or Members of the Subcommittee might have.
section_title: The Inspector General Act
paragraphs: 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  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.