Of the three kinds of grants-in-aid—categorical, block, and general-purpose fiscal assistance—block grants lie in the grey, middle area. Categorical programs feature narrowly prescribed, federally determined program objectives, processes, and administration. At the opposite end of the spectrum—general-purpose fiscal assistance—recipients are free to spend grant funds in the manner they choose with few, if any, federally imposed programmatic or administrative requirements. Although existing block grants differ with respect to specificity of objectives and administrative requirements, most share the following characteristics: federal aid is authorized for a wide range of activities within a broadly defined functional area; recipients have substantial discretion to identify problems, design programs, and allocate resources; administrative, fiscal reporting, planning, and other federally imposed requirements are limited to those necessary to ensure that national goals are being accomplished; and federal aid is distributed on the basis of a statutory formula with few, if any, matching requirements and, historically, spending has been capped. A decision on whether to block grant programs raises important questions involving the appropriate balance of power and responsibilities in our federal system. Thus, the question of whether and what kind of accountability to require is a policy decision for the Congress to make. In previous reports, we have stated that states have become more capable of responding to public service demands and initiating innovations in the past two decades. At the same time, we have also noted that the new block grant proposals include programs that are much broader than block grants of the past and would present a challenge for states to both implement and finance. Accountability is an important yet elusive concept whose meanings and characteristics differ depending upon the context. For categorical grant programs, accountability is promoted through rules and regulations that hold state and local officials responsible for federally established programmatic objectives, implementation strategies, and administrative processes that are largely prescribed by federal agencies. Under block grants, the principal locus of accountability shifts from the federal government to the states, consistent with the fact that grant purposes are broadened and authority is delegated. Under block grants, state and local elected officials bear the primary responsibility for monitoring and overseeing the planning, management, and implementation of activities that formerly were the purview of federal agencies. Nonetheless, because federal funds are involved, some residual accountability for national objectives is invariably provided, albeit in different doses and through different means. For block grants, accountability plays a critical role in balancing the potentially conflicting objectives of increasing state and local flexibility while attaining certain national objectives. Accordingly, the resolution of these issues invariably reflects a political decision properly decided through the democratic process. The recent history of block grants suggests that the balance struck between federal objectives and state discretion has often been unstable. The failure to reach an acceptable accommodation of these competing concerns can undermine continued support for block grant programs. As a result, the balance is often adjusted and reformulated as implementation proceeds. In building accountability into block grant programs, problems can arise from either too many accountability provisions or too few. The presence of too many requirements and conditions can inhibit states from realizing the kinds of efficiencies and service delivery improvements promised by the block grant mechanism. Overly prescriptive federal requirements can limit states’ abilities to integrate related federal and state programs in new and more efficient ways. Moreover, they may limit states’ interest in taking ownership and responsibility for program management and results—a key attribute that the 1981 block grants initially succeeded in instilling at the state level. Prompted by their newly won flexibility, state legislators and governors exercised a level of involvement and oversight for block grant programs typically not found for categorical programs. On the other hand, insufficient federal accountability provisions can create other problems for consolidated programs. Continued congressional support for block-granted programs has historically rested on sufficient information and assurances that the funds are being well managed and used to support national objectives. The recent history of block grants suggests that the absence of such provisions can either undermine continued congressional funding or prompt recategorization and prescriptive regulations to ensure that national objectives are achieved. For instance, the block grants enacted as part of the Omnibus Budget Reconciliation Act of 1981 (OBRA), which lacked consistent national program reporting on state implementation, were subject to more than 50 congressional actions to tighten program requirements and accountability provisions. A balance will need to be struck to respond to these two conflicting objectives. It should include safeguards to ensure that states are applying proper financial controls. Also, the Congress will not only have to determine the level and extent of national programmatic objectives for the individual block grants, but also decide the most appropriate means to monitor and oversee state progress toward these objectives. In considering ways to build financial and program accountability that could be built into the new block grants, the following observations based on our work may be useful. The Single Audit Act of 1984 provides an important tool for ensuring that states are promoting financial accountability for block grant programs. The act expanded the focus of federal oversight from a grant-by-grant examination to an overall financial audit of the state or local government or agency receiving federal funds with a specific focus on federal programs. A single audit is expected to address the states’ or state agencies’ overall financial statements and compliance with major federal assistance program requirements. Moreover, as we have said repeatedly over the years, the single audit is a more efficient and less burdensome way to use auditing resources in satisfying federal accountability interests than the prior grant-by-grant auditing approach. The Single Audit Act of 1984 helps ensure that state agencies responsible for block grant funds have sound financial management systems and internal controls. The act promotes sound financial management by requiring each state or agency to arrange for an annual audit of its financial statements. This involves more than simply preparing schedules of financial data; it involves a disciplined process that promotes proper recording of financial transactions and maintaining accurate records of financial flows. The single audit also involves evaluating the adequacy of the internal financial and management controls used by the agency to prevent problems and ensure the integrity of public funds, including block grant funds. Finally, the act, and its implementing guidance, requires that single audits test compliance with federal program requirements for “major federal assistance programs.” Auditors are required to test two types of grant requirements: (1) general requirements that are national policies prescribed by statute, executive order, or other authoritative sources that apply to federal assistance programs of two or more agencies and (2) specific requirements that apply only to individual programs. The results of single audits can also contribute toward achievement of the objectives of the Chief Financial Officers (CFO) Act of 1990. The act, as amended, requires the 24 CFO executive branch agencies to prepare financial statements, beginning for fiscal year 1996, and to have those statements audited. It also requires GAO to conduct an audit of the annual consolidated financial statements for the entire executive branch beginning with fiscal year 1997. Since many federal funds often flow to their ultimate beneficiaries through multiple state and local entities, and because many of these amounts are subject to single audit, the results of these audits can provide information on the successful completion of the required federal agency and executive branch-wide consolidated financial statement audits. The single audit process could be particularly advantageous for block grant programs. As the purposes of federal aid programs broaden and the federal financial role diminishes, federal funds become fungible. This is especially true for block grants because the programs anticipate the integration of federal and state funding streams. Accordingly, the management and outcomes of federal assistance programs depend heavily on the overall controls states use to manage the combined effort. Thus, the block grant approach coincides with the act’s shift away from individual grant auditing. It is also likely that most block grants under consideration would continue to be considered major programs for Single Audit Act purposes. Accordingly, they are likely to be reviewed for their compliance features under this process. A single audit is not and should not be viewed as sufficient for evaluating state performance relative to block grant programmatic goals and objectives. However, a single audit is an important oversight tool that can be used to provide insights into the entity operating federal programs. Although we believe that the Single Audit Act of 1984 is a suitable means for promoting financial accountability for the block grants, several improvements are needed in the single audit process. First, criteria for determining which assistance programs will be subject to compliance checks are based solely on dollar amounts. While, this approach has the advantage of subjecting a high percentage of federal funds to audit, it does not necessarily focus audit resources on identified high-risk programs. We have made recommendations to enhance the single audit process and to make it more useful for program oversight, including oversight of the block grants. Second, the single audit cannot be viewed as a substitute for management oversight and program reviews by federal agencies, should such activities be deemed appropriate for particular block grants. The single audit assesses the financial integrity and internal control of the entities receiving block grant funds and implementing programs. The audit may not select particular programs for compliance reviews if they are not defined as major programs. But even when programs are included for compliance checks, the single audit is not intended to provide in-depth analysis of state administrative practices or programmatic accomplishments. As noted earlier, block grants present a dilemma to federal policymakers for they must balance the objectives of enhancing state and local flexibility, while also maintaining a degree of federal control, consistent with the fact that federal dollars as well as national objectives are involved. There is no easy way to resolve this tension; rather, a continuum of trade-offs between federal objectives and state flexibility will be required. First, the Congress will need to consider which national objectives remain appropriate for block grant programs. Then, it will need to determine how these objectives should be defined and implemented. Among the various kinds of national objectives that could be applied to block grants are the following: Program specific requirements: These are standards or goals pertaining to program services or implementation processes funded by the grant.