Inspectors General: Oversight of Small Federal Agencies and the Role of the Inspectors General
Published: 2014-04-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The IGs play a key role in federal agency oversight by enhancing government accountability and protecting the government's resources. This includes a strong leadership role in making recommendations to improve the effectiveness and efficiency of government offices and programs at a time when they are needed most.
This testimony focuses on (1) the creation of independent IG offices, (2) IG oversight of small agencies, and (3) IG independence and budgetary resources.
This testimony provides updates of current IG responsibilities; provisions of the IG Act, as amended; and draws on prior GAO reports and testimonies conducted in accordance with GAO's Quality Assurance Framework.
GAO has made numerous observations and provided matters for the Congress to consider in prior reports when addressing IG oversight at small federal agencies and IG independence.
section_title: What GAO Found
paragraphs: The Inspector General Act of 1978, as amended (IG Act), originally established inspectors general (IG) appointed by the President and confirmed by the Senate in 12 major departments and agencies of the government to conduct and supervise independent audits and investigations; recommend policies to promote economy, efficiency, and effectiveness; and prevent and detect fraud and abuse in their departments' and agencies' programs and operations. Based in part on GAO's findings that the internal audit offices of small federal agencies lacked independence and provided inadequate coverage of important programs, the Congress passed the IG Act Amendments of 1988 to establish IGs in designated federal entities (DFE), which are generally smaller agencies established in various statutes as commissions, boards, authorities, corporations, endowments, foundations, institutions, agencies, and administrations identified by the act. The DFE IGs are appointed by their respective entity heads with duties and responsibilities similar to those of IGs appointed by the President. The Congress used a budget threshold of $100 million to help determine which DFEs should have IGs. However, additional DFEs below this threshold were also included for specific reasons.
Significant federal programs and agencies should be subject to oversight by independent IGs; however, small IG offices with limited resources might not have the ability to obtain the technical skills and expertise needed to provide adequate, cost-effective oversight. GAO has previously found that alternative approaches exist to achieve IG oversight that may be appropriate for federal agencies with small budgets and few resources. For example, GAO has recommended on a case-by-case basis that specific small agencies could benefit by obtaining IG oversight from another agency's IG office where the missions of the two agencies are somewhat similar.
Independence is one of the most important elements of an effective IG function. The IG Act, as amended, provides specific protections to IG independence. The IG Reform Act of 2008 further enhanced the IGs' independence by providing specified pay levels, IG legal counsel, a process for handling allegations of IG wrong-doing, and required notification to the Congress before an IG is removed or transferred. The IG Reform Act also requires the IGs' budget requests to be visible in the budget of the U.S. government submitted by the President to the Congress. Additional provisions to enhance the independence of IGs in DFEs with boards or commissions were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Specifically, these IGs are to report organizationally to the entire board or commission rather than a single chairperson. In addition, the IG Act requires a two-thirds majority of the board or commission to remove the IG.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the oversight of federal agencies  with relatively small budgets and resources and the role of the inspectors  general (IG). IG offices play a key role in federal agency oversight by  enhancing government accountability and protecting the government’s  resources. This includes a strong leadership role in recommending  improvements to the effectiveness and efficiency of government offices  and programs at a time when they are needed most. The Inspector  General Act of 1978, as amended (IG Act), established IG offices at major  departments and agencies to conduct and supervise audits and  investigations; recommend policies to promote economy, efficiency, and  effectiveness; and prevent and detect fraud and abuse in their  departments’ and agencies’ programs and operations.
My testimony today focuses on (1) an overview of the creation of  independent IG offices, (2) IG oversight of small agencies, and (3) IG  independence and budgetary resources. In preparing this testimony, we  included updates of current IG responsibilities and provisions of the IG  Act and relied on our prior work related to these issues. More detail on  our scope and methodology is included in each issued product. The work  on which this testimony is based was conducted in accordance with all  sections of GAO’s Quality Assurance Framework that are relevant to our  objectives. The framework requires that we plan and perform the  engagement to meet our stated objectives and that we discuss any  limitations in our work. We believe that the information and data obtained,  and the analysis conducted, provide a reasonable basis for any findings  and conclusions in this product. See the specific reports cited throughout  this testimony for information on the standards applied.
subsections: section_title: Overview of the Creation of IG Offices
paragraphs: The IG Act originally established IGs appointed by the President and  confirmed by the Senate in 12 major departments and agencies of the  government in 1978. Since then, additional IGs have been added  through a series of amendments to the IG Act. The Inspector General Act  Amendments of 1988 established IGs appointed by their respective entity  heads in designated federal entities (DFE) identified by the act with duties  and responsibilities similar to those of IGs appointed by the President.  DFEs are generally smaller agencies established in various statutes as  commissions, boards, authorities, corporations, endowments,  foundations, institutions, agencies, and administrations.
Prior to the 1988 amendments, both GAO and the President’s Council on  Integrity and Efficiency, which preceded the Council of Inspectors  General on Integrity and Efficiency (CIGIE), had found that the internal  audit offices of small federal agencies lacked independence and provided  inadequate coverage of important programs that could benefit from  independent oversight by an IG. Additional criteria used by the Congress to determine where to establish these new IG offices included a budget  threshold of at least $100 million for the DFEs. Specifically, those  agencies with an annual budget of $100 million or greater were  considered for inclusion in the 1988 amendments. However, other  agencies below this budget threshold were also included for specific  reasons. While the IGs in DFEs generally have the same authorities and  responsibilities as those established by the 1978 IG Act, there is a clear  distinction—they are appointed and removed by their agency heads  rather than by the President and are not subject to Senate confirmation.
The 1988 amendments established a new category of “federal entity,”  which is defined to exclude departments and agencies and DFEs with  statutory IGs under the IG Act, as well as judicial and legislative branch  entities and others as specified. Further, the 1988 amendments require  the Office of Management and Budget (OMB), in consultation with GAO,  to annually publish a list of (1) DFEs and, for DFEs that are not boards or  commissions, their DFE heads and (2) the federal entities, as that term is  defined by the IG Act. OMB’s list of DFEs and federal entities is to be  published annually in the Federal Register. The 1988 amendments also  require that federal entities, which are defined to exclude entities with a  statutory IG under the IG Act, report annually by October 31 to each  House of the Congress and to OMB on, among other things, the audit and  investigative activities in their respective organizations.
GAO-11-770.
section_title: IG Oversight of Small Agencies
paragraphs: GAO has long supported the creation of independent IG offices in  appropriate federal departments, agencies, and entities, and we continue  to believe that significant federal programs and entities should be subject  to oversight by independent IGs. At the same time, we have reported  some concerns about creating and maintaining small IG offices with  limited resources, where an IG might not have the ability to obtain the  technical skills and expertise needed to provide adequate and cost- effective oversight. In the final analysis, the determination of whether to  place IGs in specific agencies is a policy decision to be decided by the  Congress. As a result, we believe there are alternative approaches that  the Congress may wish to consider to achieve IG oversight that is  appropriate for federal agencies with relatively small budgets and  resources. For example, we have recommended, on a case-by-case  basis, that specific small agencies could benefit by obtaining IG oversight  from another agency’s IG office where the missions of the two agencies  are somewhat similar. The following provides examples from our  previously issued reports on alternatives suggested for IG oversight of  small agencies.
Export-Import Bank. In 2001, we were asked to review the need for  an IG at the Export-Import Bank, which was defined by OMB as a  federal entity under the IG Act, and was not subject to IG oversight.  We found that the Export-Import Bank obtained an annual financial  audit from an independent public accountant and received additional  audits of administrative operations from its internal audit group. We  also found that the Export-Import Bank had the largest budget of all  other federal entities on OMB’s list at the time, and that it was  comparable in size to both departments and agencies with IGs  appointed by the President and with DFEs with IGs appointed by the  head of the DFE. The alternatives we provided for IG oversight of the  Export-Import Bank included (1) establishing a new IG office through  an amendment to the IG Act with an IG appointed by either the  President or by the Export-Import Bank Chairman of the Board of  Directors; (2) designating through legislation an existing IG office to  provide oversight, such as the Agency for International Development  IG; and (3) implementing a memorandum of understanding, which  acts like a contract for outside IG services and would not require an  amendment to the IG Act or other legislation. Subsequently, the  Congress amended the IG Act in 2002 to establish a statutory IG for  the Export-Import Bank, appointed by the President and confirmed by  the Senate.
Chemical Safety and Hazard Investigation Board (CSB). In 2008,  we reported on the responsiveness of CSB to past IG  recommendations. We concluded that after 10 years of operations,  CSB continued to operate in noncompliance with its statutory  mandates by not investigating all accidental chemical releases that  involved a fatality, serious injury, or substantial property damage.  Since fiscal year 2004, CSB had been obtaining IG oversight services  from the Environmental Protection Agency (EPA) IG through a  temporary statutory mandate included in its annual appropriation.  However, because of the significant issues uncovered by our review,  we provided for congressional consideration alternative oversight  mechanisms that could be achieved either by amending CSB’s  authorizing statute or by amending the IG Act to permanently give the  EPA IG the authority to serve as the oversight body for CSB and to  provide appropriations and staff allocations specifically for the audit  function of CSB through a direct line in the EPA appropriation.  Alternatives such as allowing CSB to contract for its own oversight or  create an internal audit and investigative unit were not considered as  options because of the potential limitations of contracting in terms of  both audit independence and the potentially limited duration of the  contracting relationship and due to the limited staffing that could  reasonably be allocated to an internal oversight function at an agency  of its size. The EPA IG has reported continuing oversight efforts at  CSB in recent semiannual reports to the Congress.
National Mediation Board (NMB). In a recent example, our  mandated review of the programs and management practices at NMB  concluded in a 2013 report that the board is a small agency, but with a  vital role in facilitating labor relations in the nation’s railroads and  airlines. We found that NMB’s strategic plan lacked assurance that  its limited resources were effectively targeted toward the highest  priorities. In addition, NMB lacked certain internal controls that could  help achieve results and minimize operational problems. We also  concluded that in addition to the periodic oversight by GAO and the  annual audits of NMB’s financial statements by independent public  accountants, an existing IG office assigned with the responsibility for  providing ongoing audits and investigations of NMB and its operations  would result in more effective oversight. We provided a matter for  congressional consideration, which discussed the authorization of an  appropriate federal agency’s IG office to provide independent audit  and investigative oversight of NMB.
Foreign Affairs Reform and Restructuring Act of 1998, Pub. L. No. 105-277, div. G, §  1314, 112 Stat. 2681-761, 2681-776-77 (Oct. 21, 1998), classified at 22 U.S.C § 6533.
Overseas Private Investment Corporation. Finally, the Department of  Transportation IG is authorized to provide oversight of the National  Transportation Safety Board.
section_title: IG Independence and Budgetary Resources
paragraphs: Independence is the cornerstone of professional auditing and one of the  most important elements of an effective IG function. The IG Act provides  specific protections to IG independence that are unprecedented for an  audit and investigative function located within the organization being  reviewed. These protections are necessary in large part because of the  unusual reporting requirements of the IGs, who are subject to the general  supervision of their agency heads and are also expected to provide  independent reports of their work externally to the Congress.
The IG Act provides the IGs with independence by authorizing them to  select and employ their own staffs, make such investigations and reports  as they deem necessary, and report the results of their work directly to  the Congress. In addition, the IG Act provides the IGs with a right of  access to information, and prohibits interference with IG audits or  investigations by agency personnel. The act further provides the IGs with  the duty to inform the Attorney General of suspected violations of federal  criminal law.
With the growing complexity of the federal government, the severity of the  problems it faces, and the fiscal constraints under which it operates, it is  important that an independent, objective, and reliable IG structure be in  place where appropriate in the federal government to ensure adequate  audit and investigative coverage. The IG Act provides each IG with the  ability to exercise judgment in the use of independence protections  specified in the act; therefore, the ultimate success or failure of an IG  office is largely determined by the individual IG placed in that office and  that person’s ability to maintain independence both in fact and  appearance.
The Congress passed the IG Reform Act of 2008 (Reform Act) to further  enhance IG independence and accountability. Among other provisions,  the Reform Act requires the rate of basic pay of the IGs appointed by the  President to be at a specified level, and for the DFE IGs, at or above that  of a majority of other senior-level executives at their entities. The Reform  Act also requires an IG to obtain legal advice from his or her own counsel  or to obtain counsel from another IG office or from CIGIE. Additionally,  the act provides a statutory process for handling allegations of  wrongdoing by IGs so that such reviews are not done by the same  management officials who are subject to IG oversight. The act also  requires both the President and the DFE heads to give written reasons to  the Congress for removing or transferring an IG at least 30 days prior to  the action.
The Reform Act also increased the visibility of the IGs’ budgetary  resources through the annual budget process. Specifically, the act  requires that IG budget requests include certain information and be  separately identified in the President’s budget submission to the  Congress. In addition, along with the separately identified IG budgets, an  IG may include comments with respect to the budget if the amount of the  IG budget submitted by the agency or the President would substantially  inhibit the IG from performing the duties of the office. These budget  provisions are intended to help ensure adequate funding and additional  independence of IG budgets by providing the Congress with transparency  into the funding of each agency’s IG while not interfering with the agency  head’s or the President’s right to formulate and transmit their own budget  amounts for the IG.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection  Act (Dodd-Frank Act) amended the IG Act with provisions to enhance the  independence of IGs in DFEs with boards or commissions. Specifically,  the Dodd-Frank Act changed who would be considered the head of  certain DFEs for purposes of IG appointment, general supervision, and  reporting under the IG Act. If the DFE has a board or commission, the IG  Act now requires each of these IGs to report organizationally to the entire  board or commission as the head of the DFE rather than an individual  chairman. In addition, the IG Act requires the written concurrence of a  two-thirds majority of the board or commission to remove an IG. Prior to  this protection, most DFE IGs reported to, and were subject to removal  by, the individual serving as head of the DFE.
In other past legislative reforms, the Congress has taken actions to  convert IGs from appointment by the agency heads to appointment by the  President with Senate confirmation as a way to enhance IG  independence. For example, on the heels of the savings and loan and  banking crisis over two decades ago, the role of the Federal Deposit  Insurance Corporation’s (FDIC) IG became increasingly important in  providing oversight. Because of the perceived limitation of the FDIC IG’s  independence resulting from agency appointment, the Congress  converted the IG from agency appointment to appointment by the  President with Senate confirmation. In another example, the Congress  took action to convert the Tennessee Valley Authority (TVA) IG to  appointment by the President with Senate confirmation because of  concerns about interference by TVA management. In both cases,  Congress recognized that the IG’s independence would be enhanced by  the presidential appointment.
section_title: Concluding Observations
paragraphs: IGs play a critical role in federal oversight and we believe that all  significant federal programs and entities should be subject to oversight by  IGs. We have supported the creation of additional IG offices and the  enhancements to their independence by past legislation. However, we  continue to have some concerns about creating and maintaining IG  offices in relatively small federal agencies where it may not be cost- effective to obtain the skills and expertise needed to provide adequate  oversight. We believe there are alternatives to creating additional IG  offices that can be both effective and less costly. These alternatives for  oversight should be decided on a case-by-case basis depending on the  critical nature of the small agencies’ missions and the risks identified that  require increased oversight. Because the Congress relies on the IGs to  provide current information about their respective agencies’ programs and  activities, the determination of where and how to provide IG oversight in  specific agencies is a policy decision addressed best by the Congress.
This concludes my formal statement. Chairman McCaskill, Ranking  Member Johnson, and Members of the Subcommittee, I would be  pleased to answer any questions that you or the Subcommittee members  may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact me at (202) 512-2623 or davisbh@gao.gov. Contact points   for our Offices of Congressional Relations and Public Affairs may be   found on the last page of this statement. GAO staff who made key  contributions to this testimony are Jackson Hufnagle (Assistant Director),  Lauren S. Fassler, Gregory Marchand, Taya Tasse, and Clarence Whitt.
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