Single Audit: Efforts Underway To Implement 1996 Refinements
Published: 1999-05-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO discussed the status of efforts to implement the Single Audit Act Amendments of 1996, focusing on: (1) the importance of the 1996 amendments; (2) the actions taken to implement them; and (3) ways in which the refinements will continue to evolve and benefit future single audit efforts.
section_title: What GAO Found
paragraphs: GAO noted that: (1) the concept of the single audit was created to replace multiple grant audits with one audit of an entity as a whole; (2) the objectives of the Single Audit Act, as amended, are to: (a) promote sound financial management, including effective internal controls, with respect to federal awards administered by non-federal entities; (b) establish uniform requirements for audits of federal awards administered by non-federal entities; (c) promote the efficient and effective use of audit resources; (d) reduce burdens on state and local governments, Indian tribes, and nonprofit organizations; and (e) ensure that federal departments and agencies rely upon and use audit work done pursuant to the act; (3) the 1996 amendments were effective for audits of recipients' fiscal years ending June 30, 1997, and after; (4) the refinements cover a range of fundamental areas affecting the single audit process and single audit reporting, including provisions to: (a) extend the law to cover all recipients of federal financial assistance; (b) ensure a more cost-beneficial threshold for requiring single audits; (c) more broadly focus audit work on the programs that present the greatest financial risk to the federal government; (d) provide for timely and summary reporting of audit results; (e) promote better analyses of audit results through establishment of a federal clearinghouse and an automated database; and (f) authorize pilot projects to further streamline the audit process and make it more useful; (5) in June 1997, the Office of Management and Budget (OMB) issued Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; (6) the Circular establishes policies to guide implementation of the Single Audit Act 1996 amendments and provides an administrative foundation for uniform audit requirements for nonfederal entities that administer federal awards; (7) OMB also issued a revised OMB Circular A-133 Compliance Supplement; (8) the Compliance Supplement identifies for single auditors the key program requirements that federal agencies believe should be tested in a single audit and provides the audit objective and suggested audit procedures for testing those requirements; (9) GAO reported in its 1994 report that the Compliance Supplement had not kept pace with changes to program requirements, and had only been updated once since it was issued in 1985; (10) GAO recommended that the Compliance Supplement be updated at least every 2 years; and (11) OMB is now updating this supplement on a more regular basis.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the status of efforts to implement  the Single Audit Act Amendments of 1996.  These amendments refined the  single audit requirements enacted 12 years earlier, in 1984.  The 1996  refinements and the Office of Management and Budget’s (OMB)  implementing guidance provide the underpinnings to improve the auditing  for the more than $300 billion annually of federal assistance provided to  nonfederal entities.
As a result of the 1996 amendments, uniform requirements are now in place  for all federal grant recipients--state and local governments, colleges and  universities, hospitals, and nonprofit entities.  Many of the audit burdens  previously facing these governments and nonprofit organizations have  been reduced and the audits will be more effective because they will focus  on the programs that present the greatest financial risk to the federal  government.
The changes embodied in the 1996 refinements were developed through the  collaborative efforts of the many stakeholders in the single audit process,  including OMB, the federal inspectors general, federal and state program  managers, the state auditors, the public accounting profession, and us.   This Subcommittee played an important role by supporting the legislation  needed to enact those changes.
Today, I would like to provide a perspective on the importance of the 1996  amendments, describe some of the actions taken to implement them, and  discuss ways in which the refinements will continue to evolve and benefit  future single audit efforts.  Because of phased-in effective dates in the law  and in the OMB implementing guidance, it is too early to fully assess the  effectiveness of refinements.  However, this hearing should help to keep  attention on the refinements and ensure that the momentum achieved thus  far in implementing the 1996 amendments continues.
subsections: section_title: Evolution of the 1996 Refinements
paragraphs: The concept of the single audit was created to replace multiple grant audits  with one audit of an entity as a whole.  The single audit is an  organizationwide audit that focuses on internal control and the recipient’s  compliance with laws and regulations governing the federal financial  assistance received.  The objectives of the Single Audit Act, as amended,  are to promote sound financial management, including effective internal  controls, with respect to federal awards administered by nonfederal  entities; establish uniform requirements for audits of federal awards  administered by nonfederal entities; promote the efficient and effective use of audit resources; reduce burdens on state and local governments, Indian tribes, and ensure that federal departments and agencies, to the maximum extent  practicable, rely upon and use audit work done pursuant to the act.
We studied the single audit process, and in June 1994, we reported on  financial management improvements resulting from single audits, areas in  which the single audit process could be improved, and ways to maximize  the usefulness of single audit reports.  We recommended refinements to  improve the usefulness of single audits through more effective use of single  audit resources and enhanced single audit reporting, and in March 1996, we  testified before this Subcommittee on the proposed refinements.
Subsequently, in July 1996, the refinements to the 1984 act were enacted.   The 1996 amendments were effective for audits of recipients for fiscal  years ending June 30, 1997, and after.  The refinements cover a range of  fundamental areas affecting the single audit process and single audit  reporting, including provisions to extend the law to cover all recipients of federal financial assistance, ensure a more cost-beneficial threshold for requiring single audits, more broadly focus audit work on the programs that present the  greatest financial risk to the federal government, provide for timely reporting of audit results, provide for summary reporting of audit results, promote better analyses of audit results through establishment of a  federal clearinghouse and an automated database, and authorize pilot projects to further streamline the audit process and  make it more useful.
subsections: section_title: OMB’s Role
paragraphs: In June 1997, OMB issued Circular A-133, Audits of States, Local  Governments, and Non-Profit Organizations.  The Circular establishes  policies to guide implementation of the Single Audit Act 1996 amendments  and provides an administrative foundation for uniform audit requirements  for nonfederal entities that administer federal awards. OMB also issued a  revised OMB Circular A-133 Compliance Supplement.
The Compliance Supplement identifies for single auditors the key program  requirements that federal agencies believe should be tested in a single audit  and provides the audit objective and suggested audit procedures for testing  those requirements.  We reported in our 1994 report that the Compliance  Supplement had not kept pace with changes to program requirements, and  had only been updated once since it was issued in 1985.  We recommended  that the Compliance Supplement be updated at least every 2 years.  OMB is  now updating this supplement on a more regular basis.  The initial  Compliance Supplement for audits under the 1996 amendments was issued  in June 1997.  A revision was issued for June 1998 audits in May 1998, and a  revision for June 1999 audits was just recently finalized.
We commend OMB for its leadership in developing and issuing the  guidance and the collaborative efforts of the federal inspectors general,  federal and state program managers, the state auditors, and the public  accounting profession in working with OMB proactively to ensure that the  guidance effectively implements the 1996 refinements.
section_title: Key Refinements and Actions to Implement Them
paragraphs: Highlighted below are several of the key refinements and some of the  actions taken to implement them.
subsections: section_title: Law Extended to All Recipients
paragraphs: The 1984 act did not cover colleges, universities, hospitals, or other  nonprofit recipients of federal assistance.  Instead, audit requirements for  these entities were established administratively in a separate OMB audit  circular, which in some ways was inconsistent with the audit circular that  covered state and local governments.  For example, the criteria for  determining which programs received detailed audit coverage were  different between the circulars.
The 1996 amendments expanded the scope of the act to include nonprofit  organizations.  To implement the 1996 amendments, OMB combined the  two audit circulars into one that provided consistent audit requirements for  all recipients.
section_title: More Cost-Beneficial Thresholds
paragraphs: The 1996 refinements and OMB Circular A-133 require a single audit for  entities that spend $300,000 or more in federal awards, and exempt any  entity that spends less than that amount in federal awards.  Also, the  threshold is based on expenditures rather than receipts.
The Congress intended for the entities receiving the greatest amount of  federal financial assistance disbursed each year to be audited while  exempting entities receiving comparatively small amounts of federal  assistance.  To achieve this, a $100,000 single audit threshold was included  in the 1984 act.  The fixed threshold, however, did not take into account  future increases in amounts of federal financial assistance.  As a result,  over time, audit resources were being expended on entities receiving  comparatively small amounts of federal financial assistance.
In 1984, we reported that setting the threshold for requiring single audits at  $100,000 would result in 95 percent of all direct federal financial assistance  being covered by single audits.  In 1994, we reported that coverage at the  same 95 percent level could be achieved with a $300,000 threshold.
Also, the refinements require the Director of OMB to biennially review the  threshold dollar amount for requiring single audits.  The Director may  adjust upward the dollar limitation consistent with the Single Audit Act’s  purpose.  We supported such a provision when the amendments were being  considered by the Congress.  Exercising this authority in the future will  allow the flexibility for the OMB Director to administratively maintain the  single audit threshold at a reasonable level without the need for further  periodic congressional intervention.
As a result of these changes, audit attention is focussed more on entities  receiving the largest amounts of federal financial assistance, while the  audit burden is eliminated for many entities receiving relatively small  amounts of assistance.  For example, Pennsylvania reported that this  change will still provide audit coverage for 94 percent of the federal funds  spent at the local level in the state, while eliminating audit coverage for  approximately 1,200 relatively smaller entities in the state.
section_title: Broader Risk-Based Focus
paragraphs: The 1996 amendments require auditors to use a risk-based approach to  determine which programs to audit during a single audit.  The 1984 act’s  criteria for selecting entities’ programs for testing were based only on  dollar amounts.
The 1996 amendments require OMB to prescribe the risk-based criteria.   OMB Circular A-133 prescribes a process to guide auditors based not only  on dollar limitations but also on risk factors associated with programs,  including entities’ current and prior audit experience with federal programs; the results of recent oversight visits by federal, state, or local agencies; inherent risk of the program.
For practical reasons related to the audit procurement process, OMB  Circular A-133 allowed auditors to forgo using the risk criteria in the first  year audits under the 1996 amendments.  Therefore, the risk-based  approach will be fully implemented in the second cycle of audits under the  1996 amendments, which started with audits for fiscal years ending June 30, 1998, and is currently in progress.  When fully and effectively  implemented, this refinement is intended to give auditors greater freedom  in targeting risky programs by allowing auditors to use their professional  judgment in weighing risk factors to decide whether a higher risk program  should be covered by the single audit.
section_title: Timely Reporting
paragraphs: Under the 1984 act, OMB guidance provided entity management with a  maximum of 13 months from the close of the period audited to submit the  audit report to the federal government.  The 1996 refinements reduce this  maximum time frame to 9 months after the end of the period audited.  The  amendments provide for a 2-year transition period for meeting the 9-month  submission requirement.
OMB’s guidelines call for the first audits subject to the revised reporting  time frame to be those covering entities’ fiscal years beginning on or after  July 1, 1998, and ending June 30, 1999, or after.  This means that March 31,  2000, will be the first due date under the new time frame.
When fully implemented, this change will improve the timeliness of single  audit report information available to federal program mangers who are  accountable for administering federal assistance programs.  The Congress  and federal oversight officials will receive more current information on the  recipients’ stewardship of federal assistance funds they receive.
section_title: Summary Reporting
paragraphs: The 1996 amendments require that the auditor include in a single audit  report a summary of the auditor’s results regarding the nonfederal entity’s  financial statements, internal controls, and compliance with laws and  regulations.  This should allow recipients of single audit reports to focus on  the message and critical information resulting from the audit.  OMB  Circular A-133 requires that a summary of the audit results be included in a  schedule of findings and questioned costs.
In 1994, we reported that neither the Single Audit Act nor OMB’s  implementing guidance then in effect prescribed the format for conveying  the results of the auditors’ tests and evaluations.  At that time, we found  that single audit reports contained a series of as many as eight or more  separate reports, including five specifically focused on federal financial  assistance, and that significant information was scattered throughout the  separate reports.
OMB Circular A-133 provides greater flexibility on the organization of the  auditor’s reporting than was previously provided. Taking advantage of this  flexibility, the American Institute of Certified Public Accountants has  issued guidance for practitioners conducting single audits that allows all  auditor reporting on federal assistance programs to be included in one  report and a schedule of findings and questioned costs.
section_title: Better Basis for Analyses
paragraphs: The 1996 refinements call for single audit reports to be provided to a  federal clearinghouse designated by the Director of OMB to receive the  reports and to assist OMB in carrying out its responsibilities through  analysis of the reports.  The Bureau of the Census was identified as the  Federal Audit Clearinghouse in OMB Circular A-133.
In our 1994 report, we noted that data on the results of single audits were  not readily accessible and discussed the benefits of compiling the results in  an automated database.  The clearinghouse has developed a database and  is now entering data from the single audit reports it has received.  As this  initiative progresses, it is expected to become a valuable source of  information for OMB, federal oversight officials, and others regarding the  expenditure of federal assistance.
section_title: Pilot Projects
paragraphs: The 1996 amendments allow the Director of OMB to authorize pilot  projects to test ways of further streamlining and improving the usefulness  of single audits.  We understand that OMB has recently approved the first  pilot project under this authority.  This first pilot, which was proposed by  and will be carried out by the State of Washington, provides for auditing the  state education agency and all school districts in the state as one combined  entity, rather than having about 200 separate single audits.  The Washington  State Auditor’s office has submitted a statement for the record that  describes in more detail the pilot project.
Our preliminary view is that the pilot has the potential to both streamline  the audit process and to provide a single report that is more useful to users  than the approximately 200 reports it will replace.  We fully support testing  options for streamlining and increasing the effectiveness of single audits  and will monitor this and any other pilot projects that are approved in the  future.
We are committed to overseeing the successful implementation of the 1996  amendments, working closely with all stakeholders in the single audit  process and periodically providing information to the Congress on the  progress being made on all of the refinements.  Mr. Chairman, this  concludes my statement.  I will be glad to answer any questions you or  other Members may have at this time.
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