[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



 
                   OVERSIGHT OF THE SINGLE AUDIT ACT

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 26, 2002

                               __________

                           Serial No. 107-209

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                    U.S. GOVERNMENT PRINTING OFFICE
                           WASHINGTON : 2003


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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                 MAJOR R. OWENS, New York
ADAM H. PUTNAM, Florida              PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                       Henry Wray, Senior Counsel
                        Justin Paulhamus, Clerk
           David McMillen, Minority Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 26, 2002....................................     1
Statement of:
    Carter, Thomas A., Assistant Inspector General for Audit 
      Services, Department of Education..........................    58
    Everson, Mark W., Controller, Office of Management and Budget    15
    Hanson, Elizabeth A., Director, Departmental Real Estate 
      Assessment Center, Department of Housing and Urban 
      Development................................................    66
    Hinton, Russell W., chair, Single Audit Committee, National 
      Association of State Auditors, Controllers and Treasurers..    35
    Knickerbocker, Frederick T., Associate Director for Economic 
      Programs, U.S. Census Bureau...............................    26
    Martin, Jack, Chief Financial Officer, Department of 
      Education..................................................    45
    Thompson, Sally E., Director, Financial Management and 
      Assurance, U.S. General Accounting Office..................     4
Letters, statements, etc., submitted for the record by:
    Carter, Thomas A., Assistant Inspector General for Audit 
      Services, Department of Education, prepared statement of...    60
    Everson, Mark W., Controller, Office of Management and 
      Budget, prepared statement of..............................    17
    Hanson, Elizabeth A., Director, Departmental Real Estate 
      Assessment Center, Department of Housing and Urban 
      Development, prepared statement of.........................    68
    Hinton, Russell W., chair, Single Audit Committee, National 
      Association of State Auditors, Controllers and Treasurers, 
      prepared statement of......................................    38
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Knickerbocker, Frederick T., Associate Director for Economic 
      Programs, U.S. Census Bureau, prepared statement of........    28
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    75
    Martin, Jack, Chief Financial Officer, Department of 
      Education, prepared statement of...........................    48
    Thompson, Sally E., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................     7


                   OVERSIGHT OF THE SINGLE AUDIT ACT

                              ----------                              


                        WEDNESDAY, JUNE 26, 2002

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Miller, Schakowsky and 
Maloney.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director; Henry Wray, 
senior counsel; Rosa Harris, GAO detailee; Justin Paulhamus, 
clerk; Michael Sazonov, Sterling Bentley, Joe DiSilvio, and 
Yigal Kerszenbaum, interns; David McMillen, minority 
professional staff member; and Ellen Rayner, minority chief 
clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order.
    Each year the Federal Government awards billions of dollars 
in grants, loans, loan guarantees, property and interest 
subsidies to State and local governments and nonprofit 
organizations. Last year alone, the Federal Government issued 
approximately $325 billion in awards and grants to these 
entities. Prior to passage of the Single Audit Act, the Federal 
Government required financial audits of each grant program to 
ensure that the grant was being appropriately spent. This often 
resulted in grant recipients undergoing multiple audits.
    For example, if Johns Hopkins University received grants 
from several Federal agencies, each grant was audited 
separately, often by different audit organizations. Since 
passage of the Single Audit Act, the recipient in this example, 
Johns Hopkins, undergoes one audit of all its grants and 
awards.
    The Single Audit Act is intended to promote sound financial 
management including effective internal controls over Federal 
awards. The act requires audits of grant recipients that 
annually expend $300,000 or more in Federal awards.
    Each year about 30,000 single audits are performed. These 
audits have identified thousands of financial management 
weaknesses. It is the Federal Government's responsibility to 
ensure that these weaknesses are corrected. It is critical that 
the Federal departments and agencies that award these grants 
ensure that these
billions of taxpayer dollars are properly spent.
    Today we will examine how effectively the Federal 
Government is accomplishing this goal. I welcome each of you, 
our witnesses, and look forward to your testimony.
    [The prepared statement of Hon. Stephen Horn follows:]
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    Mr. Horn. And now if we--as you know, all of the 
subcommittees have an oath, and if you'd stand with your people 
that back you up as well, the clerk will take their names. 
We've got about five, six behind you. Raise your right hand.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note all of these fine gentlemen 
and ladies accepted the oath. Please be seated.
    We're going to move very rapidly today, because I have to 
be in a mark-up at the Transportation and Infrastructure 
Committee at 11 a.m. I'll begin, and then we'll move ahead very 
rapidly, and I'm sure you're pleased.
    The first witness is Sally Thompson, Director, Financial 
Management and Assurance, U.S. General Accounting Office. Nice 
to have you here again.

STATEMENT OF SALLY E. THOMPSON, DIRECTOR, FINANCIAL MANAGEMENT 
         AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

    Ms. Thompson. Thank you, Mr. Chairman, and I'm pleased to 
be here to discuss our report, which was conducted at your 
request and is being released at this hearing, on the efforts 
that Education, HUD and Transportation are doing to assure that 
the Federal award recipients take timely and appropriate 
actions to correct all single audit findings, and then I would 
also like to highlight three issues that merit additional 
attention to ensure that the single audit efforts are achieving 
the full benefits envisioned by the act.
    Single audits are a critical element in the government's 
oversight and monitoring of what you mentioned was over $300 
billion in Federal awards. In regard to our report, even though 
Education, HUD and Transportation had procedures in place to 
establish responsibility for identifying and reviewing single 
audits, we found little evidence that the three agencies had 
actually evaluated and concluded on the adequacy of corrective 
actions reported, and then notified recipients of the agency's 
positions on the audit findings and the corrected actions. In 
other words, there's a statute in place, there's OMB guidance 
in place, there's agency policies and procedures, but there is 
not accountability. This is not a compliance issue. It's an 
accountability issue.
    Specifically we've reviewed 60 1999 reports from these 
agencies for their biggest programs and their biggest 
recipients, and we found 246 audit findings, of which only 30 
percent had management decision memos. The OMB circular 
requires the agencies to issue decision memos within 6 months 
of the receipt of their single audit reports. Even if they were 
to issue those management decision memos within 6 months, it 
would still be 15 months after the end of the audited period.
    Agencies' reasons for not following-up with management 
decisions included that they weren't significant, although the 
audit requirements very specifically said only significant 
findings are reported; and, that they look at subsequent year-
end single audit reports to indicate whether the recipient had 
indeed corrected the findings. However, when we add to the 15 
months another year, and this is not a timely manner of 
following-up on the audit findings to make sure that they're 
corrected.
    Program officials from the three agencies also told us that 
they followup on corrective actions through activities such as 
site visits, phone conversations and review, again, of the 
subsequent audits. However, we found very little documentation 
that demonstrated these activities.
    In addition to that, there is no agencywide analysis and 
reporting of the single audit information that was performed. 
We believe single audits provide valuable information for 
agency managers to use in strengthening accountability and 
oversight, and performing agencywide analysis of problems that 
may be consistent across single audits.
    We also feel single audits are another element in the risk 
management assessment process to reduce improper payments, 
which is a key element in the President's management agenda. 
However, when we talked to the agency officials at the three 
agencies, they revealed that most of the program managers were 
not communicating this information to the top agencies.
    We are recommending that the secretary of each of these 
agencies implement policies and procedures that clearly define 
roles and responsibilities and ensure accountability of timely 
and appropriate actions are occurring on all audit findings. We 
also feel that this reporting should include information on the 
types of audit findings identified in the single audit reports 
and the status of those corrective actions. The agency head 
could be doing agencywide analysis on these findings.
    Now I would like to to talk briefly about three issues that 
are of concern to us: Whether all single audits are being 
conducted, whether the recipients perform the proper monitoring 
of subrecipients, and whether the single audits comply with 
auditing standards.
    In the audit universe, we generally have an honor system. 
We depend on the recipients to arrange the single audits. We 
have no government-wide tracking system that accumulates, 
tracks and reports the total amount of all awards expended by 
an agency or a recipient. This key is essential for being able 
to manage across the Federal Government.
    Subrecipient monitoring. Right now when the States receive 
audit awards, grant awards, they are responsible for reporting 
to the agency. However, they distribute that money to many of 
the local governments and nonprofits, and the States are the 
ones that are held accountable for following up on those 
subrecipients. Agencies never know what those findings are, nor 
do they know whether they've been corrected or not.
    The very last issue is audit quality. We have a survey that 
we did on the last report we issued to you. We found that the 
IGs participated in about 109 reviews and found significant 
problems with the audits that were being done in the area of 
internal control, as well as compliance. We believe that this 
indicates how major the problem is with the quality of audit 
control.
    This concludes my remarks, and I'd be glad to answer 
questions.
    Mr. Horn. Thank you.
    [Note.--The GAO report entitled, ``Single Audit, Actions 
Needed to Ensure That Findings are Corrected,'' may be found in 
subcommittee files.]
    [The prepared statement of Ms. Thompson follows:]
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    Mr. Horn. We now have the second presenter, the Honorable 
Mark W. Everson, Controller, Office of Management and Budget.

STATEMENT OF MARK W. EVERSON, CONTROLLER, OFFICE OF MANAGEMENT 
                           AND BUDGET

    Mr. Everson. Thank you, Mr. Chairman. I have a statement 
that goes on at some length on these issues, but I will just 
try to summarize it for you.
    I think first I want to say obviously the issues that GAO 
has raised are significant and need to be addressed.
    Mr. Horn. Without objection, we'll have your complete 
statement as if you read it, and go ahead on the summary.
    Mr. Everson. Just picking and choosing from it, I'll try 
and hit the high points.
    I think the reference you made to statutory changes that 
were made in 1996, we think clearly they're having a positive 
effect, but more needs to be done in terms of improving the 
audit quality, in terms of--as I'm sure my fellow panelists 
will say--using--furthering the use of technology to get better 
data. And I would just suggest that the progress has, however, 
been considerable, and it's--it must be considerable, because 
as you've pointed out, over $300 billion of the expenditures, 
the outlays of the government, now come in the form of these 
grants. In fact, it's something that I was rather startled when 
I came back into government to learn that it's actually a 
larger number than procurement. The money that is expended 
through grants exceeds procurement.
    I think we have a chart that just shows where--the pie 
chart indicates just how much goes into grants. Actually in 
terms of--outlays for fiscal year 2001 exceeded the money spent 
on the national defense by almost $10 billion.
    If you look at that, it's actually growing as well, 
principally because of the increase in the Medicaid payments, 
but it's actually increased from 11 percent of total outlays in 
1990 to 17 percent in 2001. And we would expect that this 
figure would grow as time goes on, making it all the more 
important that we have appropriate financial controls and are 
looking at how these moneys are expended.
    Right now the--this is an area where we are dependent, as 
in much of the administration's initiatives to control 
erroneous payments, on the efforts of States in particular. 
They are the largest grantees. In fact, if you look at just the 
top five States, they receive as grantees about half of this 
$320 billion. So you've got California, New York, Texas, 
Illinois and Florida that constitute half of the recipients for 
these moneys.
    We are looking at the audit threshold right now. The audit 
is required for any grantee over $300,000. We're looking at 
whether we ought to increase that level. It would not in any 
way, shape or form do anything to reduce the dollar coverage, 
but it would reduce the burdens. Audits are obviously costly.
    As was mentioned by Ms. Thompson, the management 
initiatives--the President's management initiative to reduce 
erroneous payments targets this very area. We need to do more, 
particularly with the three departments that have been 
mentioned, because if you look at the expenditure, the moneys, 
and you slice it not by grantee, but you slice it by programs, 
there are 665 programs that are the vehicles for this funding, 
and the largest three are as mentioned. Health and Human 
Services has almost $200 billion; again, Medicaid being a big 
piece here. But Transportation and HUD are also quite large, 
with about $40 billion at Transportation, almost 30- at HUD. So 
we need to attack it both on a grantee basis, that is to say, 
where the money goes, but also, as was indicated, on a 
management basis of the very clear programmatic and 
accountability responsibility.
    We do think the audits are having a result. There are clear 
cases where moneys have been recovered. An example of that 
would be when Aid to Families With Dependent Children--when 
that was folding down, the audits actually indicated problems 
in over $20 billion--pardon me, $20 million was--of 
overpayments that hadn't been provided or given back to the 
government, that was secured through just this very vehicle. So 
they're clearly a good thing.
    I guess in closing I would also emphasize the need for 
improved audit quality. Our own indications, based on the work 
that's been done by IGs, are that this is spotty. It's not as 
consistent as it ought to be. It seems this is the season to 
question audits in general. It's, I guess, not surprising that 
more needs to be done in this very critical area as well. And 
I'll leave it at that.
    Mr. Horn. Well, thank you.
    [The prepared statement of Mr. Everson follows:]
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    Mr. Horn. Our third presenter is Frederick T. 
Knickerbocker, the Associate Director for Economic Programs of 
the U.S. Census Bureau.

STATEMENT OF FREDERICK T. KNICKERBOCKER, ASSOCIATE DIRECTOR FOR 
             ECONOMIC PROGRAMS, U.S. CENSUS BUREAU

    Mr. Knickerbocker. Mr. Chairman, thank you for the 
opportunity to testify this morning. OMB Circular A-133 
designates the Bureau of the Census as the Federal Audit 
Clearinghouse. The clearinghouse provides an efficient and 
effective method of processing, distributing and archiving 
Single Audit reports, monitoring recipients' compliance with 
the requirements to submit reports required by the act, and 
capturing and analyzing information on audit results.
    The clearinghouse reduces the costs of the audit process in 
a number of ways. First, the central election function allows 
grantees to send reports to one location instead of reporting 
to each agency that provided grant funding. Next, the 
clearinghouse distributes only the reports grant-making 
agencies need to followup on audit findings. The clearinghouse 
also facilitates the identification of those organizations that 
did not submit required audits. And finally, the central 
clearinghouse provides important governmentwide audit 
information that was previously not available to Congress, OMB 
and agency program managers.
    Establishing the clearinghouse, one, reduces the reporting 
burden on non-Federal entities and, two, the number of reports 
that Federal agencies must process.
    The clearinghouse operates under the direction of OMB with 
input from the Federal agencies through a user's group and non-
Federal auditors. In fiscal year 2002, the clearinghouse 
operated with a $2.6 million budget. All of these funds are 
provided by the 24 Federal agencies included in the Chief 
Financial Officers Council.
    The clearinghouse began processing data collection forms in 
December 1997. It now processes approximately 35,000 
submissions each year. To date, the clearinghouse has processed 
approximately 150,000 data collection forms and reporting 
packages.
    The clearinghouse is currently working with OMB and members 
of the Audit Oversight Workgroup of the Chief Financial 
Officers Council on a delinquent audit plan. In July 2001, the 
clearinghouse performed a nonresponse followup test. The goal 
of the test was to determine whether efforts made by the 
clearinghouse would result in a significant number of 
additional submissions. The test results demonstrated that a 
marked improvement in the response rate is possible. The Chief 
Financial Officers Council is using these results to develop a 
governmentwide plan to identify delinquent single audits.
    The clearinghouse maintains a governmentwide data base 
covering all complete data collection form data. The data base 
is accessible to Federal agency users and the public through an 
Internet site maintained by the Census Bureau.
    Federal agency representatives made several requests for 
enhanced capabilities of the clearinghouse's Internet Data 
Dissemination System. Some of these requests resulted from 
efforts of the Chief Financial Officers Council to meet the 
requirements of the Federal Financial Assistant Management 
Improvement Act of 1999. These results resulted in several 
improvements to the clearinghouse data dissemination system.
    The data base for all completed submissions now approaches 
150,000 records and is available through the Census Website.
    The clearinghouse has also developed several electronic 
options to ease the reporting burden. Larger entities have 
expressed concerns over the burden of reporting on hundreds of 
programs, and in response we created a processing method to 
allow larger entities to submit all their data on spreadsheets 
and, therefore, to the clearinghouse via diskette. Much more 
importantly, however, this clearinghouse has developed an 
Internet data entry system. The system allows entities to 
enter, edit and submit all data electronically. The 
clearinghouse started Internet reporting in early 2000. Now 
approximately 60 percent of all submissions are reported 
online.
    Since the clearinghouse is the single submission point for 
nearly all audit reporting packages, Federal agencies generally 
no longer receive copies of the audit reports directly from 
auditees. The clearinghouse, however, currently maintains an 
archive of the current-year audit reports and those for the 4 
prior fiscal years. Requests for copies of reporting packages 
are received daily. Those from Federal awarding agencies are 
processed immediately. Public requests for copies of audits 
requires special attention due to the possible presence of 
sensitive data such as the names of individuals and Social 
Security numbers.
    For requests from non-Federal entities, the clearinghouse 
staff locates and copies the audits, and our Freedom of 
Information Act Office forwards them to the relevant agency for 
review and distribution. To assure outside consultation on this 
whole operation, a Single Audit Users Group was formed with 
representatives from the Federal grantmaking agencies, OMB, 
GAO, the clearinghouse, the public sector and private 
accounting firms, and this group has been meeting periodically 
since 1997.
    That concludes my testimony. I'd be happy to answer any 
questions.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Knickerbocker follows:]
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    Mr. Horn. We have now the ranking member here, and she, 
too, will have to leave when I leave at 11, because she's in 
the financial business where they're always meeting.
    Ms. Schakowsky. Well, we're in a markup.
    Mr. Horn. Ms. Schakowsky, the gentlewoman from Illinois.
    Ms. Schakowsky. I thank our distinguished panel, and I 
thank you, Mr. Chairman, for your leadership on financial 
management issues and for holding this hearing on the Single 
Audit Act.
    The Single Audit Act is an important piece of legislation, 
because it both improves financial accountability and reduces 
the burden the Federal Government places on nonprofit agencies 
and local governments that are receiving Federal funds.
    These audits provide the basis for public assurance that 
grant funds are being spent properly and at the same time 
allows these agencies to meet all audit requirements with a 
single annual audit.
    There are a wide variety of agencies in the city of 
Chicago, part of which I represent, which come under the Single 
Audit Act from the Archdiocese of Chicago to the Chicago 
Antihunger Federation, to the Lincoln Park Zoo. I'm pleased 
that we have reduced the burden on these organizations and that 
we can account for the Federal funds spent.
    However, I would like to challenge the auditors to look at 
these audits not simply as a review of the past, but an 
opportunity to help make these programs more effective.
    I would like us to move beyond the concerns about 
recordkeeping and work toward a system that helps these 
agencies become more efficient in the delivery of services. We 
care about the Lighthouse Group or the Jewish Children's Bureau 
not because they're good recordkeepers, but because of the good 
work that they do.
    I would like to see the auditors assist these agencies in 
streamlining their financial systems so that they can spend 
more time and more dollars on services and less on financial 
accounts. If we can use these audits to improve service 
delivery, we will have accomplished a very important goal.
    Again, I thank you, Mr. Chairman, for holding this hearing, 
and the witnesses for your testimony.
    Mr. Horn. Thank you.
    And our next presenter is Russell W. Hinton, Chair of the 
Single Audit Committee of the National Association of State 
Auditors, Controllers and Treasurers. Mr. Hinton.

STATEMENT OF RUSSELL W. HINTON, CHAIR, SINGLE AUDIT COMMITTEE, 
    NATIONAL ASSOCIATION OF STATE AUDITORS, CONTROLLERS AND 
                           TREASURERS

    Mr. Hinton. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify today on behalf of the National State 
Auditors Association regarding the Single Audit Act amendments 
of 1996. My testimony represents the combined views of the NSAA 
membership and does not necessarily represent the views of 
individual States and their implementation of the Single Audit 
Act.
    A recurring theme throughout the amendment process was for 
the implementation of the single audit process to be dynamic, 
that processes and procedures reflect changing conditions. We 
feel that the adoption of this concept will strengthen 
implementation of the single audit process significantly.
    From a State perspective, critical to an ongoing single 
audit process is maintenance of OMB Circular A-133. Four areas 
that we consider critical that need to be addressed 
periodically would include updating of the OMB A-133 compliance 
supplement, review of the single audit threshold, authorization 
for review of pilot projects and continual update of the data 
collection form.
    With regard to the OMB compliance supplement, the State 
audit community is very pleased with the efforts of OMB to 
update that document annually. It provides a wealth of 
information for those of us who are charged with the 
responsibility of auditing Federal programs.
    With regard to the single audit threshold, the amendments 
would require OMB to review the threshold triggering the single 
audit biannually, and it is our current understanding that a 
proposal from OMB will be forthcoming, calling for an increase 
in the threshold from 300,000 to 500,000. NSAA will be 
supportive of such a proposal.
    A few States opposing an increase in a threshold cite 
concerns relating to the monitoring of subrecipients. To the 
extent that additional subrecipients will no longer be covered 
under the Single Audit Act amendments of 1996, a particular 
State's monitoring efforts and audit costs may likely increase. 
There are--in conjunction with an increase in the threshold to 
$500,000, the NSAA has agreed to participate in a working group 
proposed by OMB to develop methodologies to effectively and 
efficiently monitor subrecipients.
    With regard to authorization of pilot projects, OMB may 
authorize pilot projects after consultation with appropriate 
Senate and House committees to test alternative methods of 
achieving the purposes of the amendments. It was envisioned 
that numerous pilot projects would be ongoing and would serve 
as a catalyst for future amendments to the Single Audit Act and 
A-133. Today the NSAA notes that the pilot project provision 
has not been fully utilized to explore alternatives. The NSAA 
remains supportive of the pilot project provision of the Single 
Audit Act amendments of 1996.
    Several States indicate the single audit objectives and 
corresponding audit procedures do not adequately measure 
combined Federal-State-local program results, and several 
States believe it is time to transition the focus of single 
audits from compliance audits to alternative engagement types 
through the pilot project process; i.e., performance audits or 
total program engagements. The NSAA, therefore, encourages the 
OMB and other Federal grantor agencies to initiate or solicit 
proposals for worthy pilot projects and to give appropriate 
considerations to cost/benefit and timing issues.
    With regard to single audit quality, the creation of sound 
single audit legislation does not--obviously does not guarantee 
a successful implementation. We believe that it's dependent 
upon a cooperate effort between both the Federal Government 
granting agencies and auditors.
    With regard to management decisions, we are sometimes 
frustrated in the State audit community that while Federal 
awarding agencies have shown improvements in the timeliness in 
which they address recipient audit findings, several States 
continue to be concerned that Federal awarding agencies are not 
operating at the optimum level with regards to the issuance of 
timely management decisions.
    We applaud the creation and use of the Federal Automated 
Clearinghouse Data base. It's been an invaluable tool in 
monitoring overall audit quality from a State perspective. It 
provides a wealth of information to assist us in monitoring our 
responsibilities at the State level.
    With regard to quality control reviews, NSAA considers 
quality control reviews to be one of the most effective means 
of ensuring accountability over the quality of audits conducted 
by non-Federal auditors. We would like to see an increase in 
this in conjunction with increased auditing efforts at the 
State level with regard to the quality of certain audits of 
smaller organizations. We note a large disparity in the quality 
of work being conducted at that level and feel that particular 
training and other efforts should be directed at auditees with 
regard to auditor procurement, because based on some of the 
research that we have done, we need a better grade of auditor 
at certain levels.
    We would once again emphasize--I think one of the success 
stories of the 1996 amendment has been an increased cooperation 
on the part of the Federal, State and local government audit 
community, and we would certainly applaud those efforts going 
forward. Thank you.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Hinton follows:]
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    Mr. Horn. And we now go to the Honorable Jack Martin, Chief 
Financial Officer for the Department of Education. Mr. Martin.

 STATEMENT OF JACK MARTIN, CHIEF FINANCIAL OFFICER, DEPARTMENT 
                          OF EDUCATION

    Mr. Martin. Mr. Chairman and members of the subcommittee, 
good morning. It is my pleasure to be here today on behalf of 
the Department of Education concerning the Department's actions 
and progress under the Single Audit Act.
    This past January, President Bush signed into law H.R. 1, 
the No Child Left Behind Act, closing a successful year of 
bipartisan cooperation in Congress and opening a new era in 
American education. To meet the challenges of this new law, the 
Secretary of Education, Rod Paige, implemented earlier this 
year a long-term management improvement plan, the Blueprint for 
Management Excellence. The blueprint sets a new direction 
within the Department that demands organizational excellence in 
programs, performance and management. The Single Audit Act 
complements this direction.
    My role as Chief Financial Officer is to advise the 
Secretary on matters regarding financial management, including 
audit resolution. This is my first opportunity to testify since 
being sworn in in February. Today my remarks as the audit 
followup official for the Department will be directed at key 
audit resolution improvements and some issues that make our 
process unique.
    Earlier this month GAO issued its draft report titled 
Single Audit: Actions Needed to Ensure That Findings Are 
Corrected. We're pleased to note from the report that the 
Department is doing a good job in carrying out its 
responsibilities under the Single Audit Act. We know, of 
course, there's always room for improvement.
    We support GAO's recommendations that agency management 
should be kept apprised of single audit findings and grantee 
corrective actions. Our Department issues hundreds of decisions 
a year on single audit findings, addressing program compliance 
requirements. These decisions are made at the Assistant 
Secretary's level, and these officials or their designees are 
aware of and are involved in addressing compliance issues 
targeting their programs.
    To address the findings, we will take another look at our 
audit resolution process to identify areas of internal control 
that can be further strengthened, including reviewing files to 
ensure proper documentation and resolution of findings.
    At the Department we have long recognized the importance of 
single audits as a critical measure of the effectiveness of 
education programs and student performance at the State and 
local level. To get the most out of the single audit process, 
we adopted what we referred to as a Cooperative Audit 
Resolution and Oversight Initiative, or CAROI. GAO noted in 
their report that CAROI is a practical approach to address 
complex and recurring single audit findings. We also are proud 
of the fact that the Association of Government Accountants has 
designated CAROI as a best practice. Through CAROI, the 
Department brings all key partners, Federal and State, to the 
table to address audit findings.
    Before CAROI the process was time-consuming, bred ill will 
between the Department and the grantees, and ran up high costs 
through litigation, often resulting in modest monetary 
recoveries. With CAROI, the Department works hand in hand with 
the States to resolve problems identified in audit reports.
    CAROI is an evolving process at the Department of 
Education. One of our objectives is to improve timeliness. 
Currently it may take a year or more to get a completed 
agreement among all the participant at table. We believe we can 
do better. Our most successful CAROI effort to date has been 
the Commonwealth of Pennsylvania. Over 120 findings, many 
involving complex issues and high dollar amounts, were resolved 
in a 6-month period. This extraordinary accomplishment 
demonstrates how State, Federal cooperation and teamwork can 
work when the lines of communication are fully open. The true 
measure of this program is its ability to address problems 
identified in audit reports once and for all. With this as our 
criteria, the Pennsylvania CAROI project was a resounding 
success. Subsequent single audits from the Commonwealth contain 
no repeat findings.
    Another enhancement I'd like to mention is our Triage 
program. At the Department, Triage refers to the process by 
which we assess the seriousness of audit findings to determine 
the amount of attention needed for resolution. Its purpose is 
to promote the most efficient use of audits to assist 
management in achieving program goals and discharging our 
fiduciary responsibilities, while at the same time helping us 
to use our internal resources more effectively.
    We're also in the process of updating our Post Audit User 
Guide. Our focus has been on strengthening procedures to ensure 
that the Department has an effective system for audit 
resolution, close-out, record documentation, and maintenance 
and followup. It is being developed as an Intranet document 
with links to key information. In addition to the user guide, 
we're also in the process of revising the Department's 
Discretionary Grant Handbook, which includes guidance on the 
value and use of single audits.
    We're also continuing to improve our ability to track and 
monitor audit resolution efforts. This year we began an effort 
to build a single data base system to track, monitor and report 
on the postaudit status of single audits, GAO audits and ED-OIG 
audits. We anticipate the new combined system to be up and 
running earlier next year. Our current system has been 
designated a best practice by the Association of Government 
Accountants.
    The Department of Education has some requirements unique in 
the Federal Government. One of these requirements is to 
establish a prima facie case for the recovery of funds when 
resolving our GEPA audit reports. This means that we must 
include a statement of the law and the facts that, unless 
rebutted, is sufficient to sustain the conclusion drawn in our 
management decision letter. In addition, our decision must 
include an analysis of the value of program services actually 
provided in determining harm to the Federal interest. This 
provision raises the bar for what must be included in 
management decisions in a way that requires the Department to 
take considerably more time together and analyze audit 
information and review it for legal sufficiency.
    In closing, Mr. Chairman, our goal is to ensure that 
recipients correct the weaknesses identified in the single 
audit reports, and that we take the necessary steps to ensure 
the implementation of single audit guidance as required by OMB 
Circular A-133. I appreciate the opportunity to come before 
your subcommittee and share our Department's commitment to 
effectively meet our single audit responsibilities. I'll be 
happy to answer any questions you or any member of the 
subcommittee may have. Thank you very much.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Martin follows:]
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    Mr. Horn. Now we have Thomas A. Carter, the Assistant 
Inspector General for Audit Services of the Department of 
Education. Mr. Carter.

STATEMENT OF THOMAS A. CARTER, ASSISTANT INSPECTOR GENERAL FOR 
            AUDIT SERVICES, DEPARTMENT OF EDUCATION

    Mr. Carter. Good morning, Mr. Chairman and members of the 
subcommittee. I appreciate the opportunity to discuss how the 
Offices of Inspector General meet their responsibilities to 
assure the quality of single audits under the Single Audit Act. 
The IG Act mandates that the Inspector General take appropriate 
steps to assure that any work performed by non-Federal auditors 
complies with the standards for audits established by the 
Comptroller General. The Offices of Inspector General devote 
varying resources to assuring audit quality based on their 
resources and the needs of their agency.
    OIGs apply four basic efforts to assure audit quality. Some 
OIGs use all four, while others use fewer. The first is 
performing desk reviews. All single audits undergo an initial 
desk review by the Federal audit clearinghouse to determine if 
the submitted reporting package is complete. Some OIGs or 
another office within their agency perform a second desk review 
when the report arrives at their agency.
    A second effort is conducting quality control reviews, or 
QCRs. The OIGs conduct QCRs of the auditor's working papers on 
a sample basis. The objectives are to first ensure that the 
audit was conducted in accordance with applicable standards and 
meets the single audit requirements; second, to identify any 
followup audit work needed; and third, to identify issues that 
may require management attention. QCRs are performed using the 
PCIE's uniform quality control review guide.
    The third effort for OIGs is preparing audit guidance for 
the auditors. The annual OMB Circular A-133 Compliance 
Supplement contains specific audit guidance relating to over 
150 individual Federal programs. The revision of the compliance 
supplement usually is a collaborative effort between OMB, the 
program officials, legal counsel, the Chief Financial Officer's 
staff, and the OIG. The degree of OIG involvement in the 
revision process varies among agencies. At the ED-OIG we play a 
major role providing a compliance supplement policy official 
who coordinates and works with other ED officials on revisions, 
performs a final review, and submits the completed input to 
OMB.
    The final quality-related effort of OIGs is to provide 
training and technical assistance to auditors and program 
officials on single audits. Again, the level of effort given to 
this activity varies among the OIGs. We don't have specific 
information on what the other IGs have done in this area, but I 
have included some examples of ED-OIG activities in my complete 
statement to illustrate the form and extent this can take.
    While OIGs generally fulfill their responsibilities on 
single audits independently, there is a long history of 
coordination and collaboration among members of the PCIE on 
single audits. Through this coordination, we can leverage our 
resources and take a more unified approach to resolving single 
audit issues. ED-OIG recently initiated steps to revive a 
committee of PCIE members' representatives that would provide a 
regular forum for continuing dialog on single audit matters. We 
met earlier this month and plan a followup meeting later this 
summer.
    How good is the quality of single audits? We don't really 
have a complete answer to that question. We got a partial 
answer in the spring of 2001 when the PCIE audit committee 
conducted a survey of single audit QCRs performed over a 4-year 
period. The survey reported that OIGs conducted 459 QCRs, of 
which 75 percent were judged to be acceptable, 20 percent were 
technically deficient, and 5 percent were substandard. We 
really do not know how good the quality of the audits is 
because these results may not be representative of the quality 
of all single audits.
    The selections of QCRs by us and other OIGs were based on 
judgmental factors rather than a random basis, and therefore 
the results are not projectable. To draw a statistically 
projectable sample of sufficient size and scope that would 
afford a meaningful assessment of single audit quality across 
the board would require the OIG community to develop and 
execute a sample of single audits for which all OIGs have 
oversight responsibilities. We have taken a first step toward 
achieving that projectable sample. At our June meeting the OIG 
community agreed to begin exploring ways to conduct a 
statistical sample of QCRs.
    In summary, the Offices of Inspector General have a key 
role in ensuring the quality of single audits, and they are 
performing a number of efforts to improve the quality. We 
currently do not have a valid measure of the quality of single 
audits, and we cannot properly measure how effective our 
efforts are. This is why the current effort to develop a 
statistically valid sample needs to be successful.
    Mr. Chairman and members of the subcommittee, I will be 
happy to answer any questions you may have for me.
    Mr. Horn. Thank you, Mr. Carter.
    [The prepared statement of Mr. Carter follows:]
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    Mr. Horn. And our last presenter is Elizabeth Hanson, 
Director of the Departmental Real Estate Assessment Center of 
the Department of Housing and Urban Development.

 STATEMENT OF ELIZABETH A. HANSON, DIRECTOR, DEPARTMENTAL REAL 
   ESTATE ASSESSMENT CENTER, DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Ms. Hanson. Thank you, Mr. Chairman and members of the 
subcommittee.
    Financial and compliance audits, including audits of State 
and local governments and nonprofit entities under the Single 
Audit Act, are an essential element of the U.S. Department of 
Housing and Urban Development's management control and 
oversight of its housing and community development programs.
    The Office of Public and Indian Housing's Real Estate 
Assessment Center is responsible for electronically collecting 
and assessing audit reports from housing providers receiving 
financial assistance from either the Office of Public and 
Indian Housing or the Office of Multifamily Housing. For the 
approximately 3,200 public housing agencies and the 8,700 
nonprofit owners of multifamily projects, this means an audit 
in accordance with the Single Audit Act and OMB Circular No. A-
133. The Real Estate Assessment Center uses the financial 
submissions to assess the financial condition and regulatory 
compliance of the property, or the PHA, and assigns the 
property or PHA to one of three risk categories depending upon 
whether the property is a good, marginal or troubled performer.
    The financial submissions and assessment results are 
referred to program staff in HUD's Office of Public and Indian 
Housing and the Office of Multifamily Housing for use in risk-
based targeting of technical assistance, onsite monitoring and 
enforcement activities to improve program compliance and 
performance.
    The Real Estate Assessment Center has set up a division to 
assure the quality of the audits. The Quality Assurance 
Subsystem consists of a staff of auditors whose primary purpose 
is to conduct quality assurance reviews, together with 
certified public accounting firms that perform financial 
statement audits of HUD housing program participants.
    Based on several factors, we select high-risk firms for 
quality assurance reviews annually. The selection criteria 
includes outstanding referrals from both financial analysts at 
the Real Estate Assessment Center and HUD program offices, 
total assets audited by the firm among all HUD-related 
engagements, and total revenues audited by the firm for HUD-
related engagements. Also, if a firm audited 10 or more 
entities during the previous fiscal year or identified no audit 
findings, that is considered a factor for selection.
    When substandard work is identified, the QASS team 
recommends administrative sanctions which include one or more 
of the following: Referral to one or more of the State boards 
of accountancy in the States where the CPA firm practices, 
referral to HUD's Departmental Enforcement Center for potential 
debarment proceedings, and referral to the American Institute 
of Certified Professional Accountants.
    There are approximately 340 CPA firms auditing about 2,150 
PHAs, and the top 10 percent of those firms audit about 68 
percent of this population. Many of these firms are either sole 
practitioners or firms with three or fewer CPAs on staff. The 
average number of audits performed by the top 10 percent of 
firms is 44 audits per year, with a range between 35 and 114 
audits. Seven sole practitioners do more than 50 audits 
annually, with one CPA doing 98 audits by himself. A firm with 
only 3 CPAs audited 8 of the 33 largest PHAs in the country.
    Analysis of referrals that QASS has received, as well as 
the quality assurance reviews already completed indicate that 
several high-volume practitioners do not have the resources to 
perform PHA audit engagements in accordance with the 
professional auditing standards or within timeframes required 
by the Department. A combination of high volume and limited 
staff resources means that audit quality suffers. With fees 
being directly related to the time spent on an audit 
engagement, fewer staff hours not only result in a lower fee, 
but also a lower quality of work.
    Of the 25 PHA auditors reviewed during the 12 months ending 
February 2002, QAR results indicate that 20 firms were not in 
compliance with professional auditing standards. We have made 
18 referrals for administrative sanctions, and we have an 
additional 10 referrals pending. The majority of these are to 
the State boards of accountancy where the CPAs practice. 
However, there are four debarment actions pending at the 
Departmental Enforcement Center.
    For multifamily housing projects, regardless of whether it 
is a profit-motivated owner or a nonprofit, we've determined 
that there are approximately 2,260 CPA firms providing audit 
services to the populations of owners required to submit audits 
to HUD. For this program, the top 10 percent of firms audit 
about 55 percent of the population.
    In fiscal year 2001, we reviewed 87 firms that performed 
multifamily audits, both A-133 and program-type audits, though 
primarily profit-motivated owners. QASS identified only one 
firm with severe performance problems. In general the firms 
that perform the most multifamily audits are regional, large 
local or national firms with adequate staffing for their 
workload.
    Other HUD grant programs such as those administered by the 
Office of Community Planning and Development are also relying 
on audits under the Single Audit Act as an essential component 
of their program management control and oversight. In this 
area, HUD's program field staff are responsible for obtaining 
and acting on single audits to ascertain the financial 
condition and compliance of the program participants. However, 
recent review by the U.S. General Accounting Office cited that 
these HUD program areas do not have a central system to assure 
that single audits are properly received and acted upon. HUD 
has plans in place to better assure that all required single 
audits are properly received and acted upon in all HUD program 
areas.
    Thank you.
    Mr. Horn. We thank you.
    [The prepared statement of Ms. Hanson follows:]
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    Mr. Horn. And now we'll start the Q and A, and one question 
I want to all of you to answer, and that has been mentioned, 
the Office of Management and Budget is working toward 
increasing the single audit threshold from $300,000 to 
$500,000.
    Ms. Hanson, what are your views on the increase?
    Ms. Hanson. We have looked at it from the perspective of 
the multifamily and public housing programs, and it's not going 
to significantly impact our oversight of those public housing 
agencies or the multifamily property owners. In terms of the 
dollar amounts covered by those entities, it's not significant. 
And in addition, we continue to receive the unaudited financial 
submissions from those property owners and public housing 
agencies, so we still have the ability to look at the financial 
information.
    Mr. Horn. Mr. Carter.
    Mr. Carter. We haven't taken an official look at it yet, 
but from discussions with my non-Federal staff, I believe our 
position would be that it would not be a bad idea to increase 
the threshold.
    Mr. Horn. Mr. Martin.
    Mr. Martin. We haven't officially examined the $500,000 
threshold, but I think our position would be to support it.
    Mr. Horn. Mr. Hinton.
    Mr. Hinton. The National State Auditors Association would 
support such a proposal. As I stated in my testimony, some of 
the concerns are among the States for--whereby the State has 
linked their monitoring efforts to the threshold, and there 
will have to be some review there, but NSAA would be in support 
of it.
    Mr. Horn. Mr. Knickerbocker.
    Mr. Knickerbocker. Increasing the threshold will presumably 
reduce the number of submissions, but from the clearinghouse 
standpoint, we stand ready to process any number of 
submissions.
    Mr. Horn. Mr. Knickerbocker.
    Mr. Knickerbocker. Oh, yes, sir. Again, as I said, 
presumably increasing the threshold will reduce the number of 
submissions, but from the clearinghouse standpoint, we stand 
ready to process any number of submissions.
    Mr. Horn. Mr. Everson.
    Mr. Everson. I'd just point out here, our understanding is 
there are about 34,000 entities that get audited. This would 
knock out 6,000 of those entities. That's only 18 percent, but 
it would--the dollar coverage would be less than 1 percent that 
you're losing by taking that step. So we think it lightens the 
burden, reduces the burden on the public with no change in the 
risk quotient from the overall Federal Government point of 
view.
    Mr. Horn. Ms. Thompson.
    Ms. Thompson. On the surface I think GAO would be in 
support of that, but I would say that there needs to be a 
balancing to look at the subrecipients, because the Federal 
agencies are not getting those reports from the subrecipients. 
They are going directly to the State, and we don't know what 
the effect would be on those, and I think there needs to be an 
analysis on that.
    Mr. Horn. I thank you. We're going to be in recess until 11 
a.m., and Mr. Miller will assume the Chair as chairman. And so 
I thank you very much for coming.
    Mrs. Maloney. May I ask one question?
    Mr. Horn. Well, can you wait for Mr. Miller, because I have 
to be in Transportation. Otherwise I'd love to do it.
    [Recess.]
    Mr. Miller [presiding]. The hearing will continue. We will 
proceed with questions and ask Mrs. Maloney to go.
    Mrs. Maloney. I am delighted to join with my good friend 
Dan Miller and place my regrets that he has decided not to run 
for reelection. He has been an outstanding Member of this body 
and I will miss him. I wish he would reconsider.
    I also welcome all the witnesses and just briefly state 
that the Single Audit Act was created in 1984, amended in 1996, 
in order to ensure that money awarded by the Federal Government 
is well spent by the private organizations that get it. 
Entities that receive over $300,000 of the taxpayers' money 
must arrange to have a single audit which agencies, with the 
help of the Federal Audit Clearinghouse, are supposed to review 
in order to spot misuse of government funds.
    Many agencies also consult the audits before awarding 
money, to check how recipients have handled previous awards of 
Federal money. Those agencies who do not should begin this 
commonsense practice.
    As someone who has tried to serve and work with Mr. Miller 
and others to look at ways to better manage taxpayers' money, I 
am disturbed by some of the failings that have been reported by 
the single audit system. For example, the Department of Health 
and Human Services--and I understand they are not with us 
today--has twice been cited in GAO reports as not having any 
comprehensive way to deal with the Single Audit Reports that 
come into its agencies. In an April 23rd report and a June 11th 
report that I requested, with Wisconsin Representatives Barrett 
and Kleczka, the GAO reported that HHS did not know the extent 
to which the single audits they had received revealed the 
misuse of funds because they had no comprehensive system of 
analyzing the reports.
    The Department of Health and Human Services serves the 
neediest among us. It is our job to make sure that money 
intended to provide food, schooling, or job training is not 
wasted or stolen by incompetent or criminal organizations. And 
without adequate oversight from HHS, we have no way to tell how 
much of that money is truly going to the ones that most need 
our help.
    I know we have other Federal agencies represented here 
today, and I look forward to reading your testimonies. I did 
hear some of it.
    But as I was talking while we were waiting with Mark 
Everson from the OMB, the Comptroller there, he indicated, I 
thought, something very wise to me: that this really has to be 
a team effort with the States and the localities, and that we 
send this money oftentimes in block grants or direct grants to 
the States and localities, and that they should be playing 
their part in making sure that these funds are well spent.
    I used to be a member of the City Council of New York for 
10 years, and have many friends on that body. And if any of you 
have any ideas of how we could--I'll just use my city, because 
I know New York has many needy people and has many--a great 
deal of funding from HHS and other housing and other areas--of 
ways that we could get the city to work with us to help us 
improve what we're doing.
    I can tell you, when I did come to the Federal Government 
from the city of New York, I was amazed at how well run the 
Federal Government is. I think it is extremely well run 
compared to the city of New York, which I think is well run, 
but your controls and oversight were superior to that which we 
had worked to put in place in the city.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]
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    Mrs. Maloney. I have two questions:
    No. 1: How can we get the localities to take some of this 
burden off of us, and responsibility, to make sure that the 
moneys are spent well?
    And the second is really the result of the GAO report that 
said that often they will, in the single audit, they will 
analyze and see something wrong; yet then there is no followup 
to make sure that it is corrected. So why even bother to have 
an audit if you are not going to then take the next step, which 
is to correct whatever it is that is a mismanagement, which may 
be just something as innocent as not really being a 
sophisticated manager in some areas of the country or even in 
the city of New York? Why bother with a single audit if we 
don't correct the problems that come out of it?
    I would like to open those two questions up. If anyone has 
an idea of how you respond to the point that I raised that 
oftentimes they come up with ideas that are of mismanagement, 
yet no one follows through, how do we get the Federal 
Government to follow through? But, on the other hand, it should 
not just be the Federal Government's responsibility, it should 
be part of the city's and the State's to work in partnership 
with us. How do we shift some of this responsibility in a way 
that is accountable to the local areas so that we can make sure 
that the dollars get to the people who need it, and, very 
importantly, are well spent in the way that we intend when we 
vote in Congress to help the poor that it truly does?
    So I just open it up for comments from anybody.
    Thank you, Mr. Chairman for yielding to me. Always a 
gracious gentleman. Thank you.
    Mr. Everson. Maybe I could try to frame it from the center 
at OMB, if you will, and from the President's Management 
Council point of view, if I could.
    First, thank you very much for your offer on New York City, 
and we will take a look at that and come back to you.
    But the President's management agenda has, as one of his 
five core areas, improved financial performance. Central to 
that is the reduction of erroneous payments. This is part and 
parcel of that effort, because what you have here is you have 
an attack on this through two levels. One is very much through 
the departments that run these programs, and the word 
``accountability'' that was used earlier is quite--quite 
central to this--this whole issue.
    We are working with the departments, including those 
represented here and others, to make sure they're following up 
on this whole area. They're doing studies and indicating to us 
what the erroneous payment rate is, which is--which is clearly 
one of the things you determine through these audits. And I 
think we are going to make some progress.
    It is a complicated issue, though, and it is complicated 
because of the other point that you raised, which is that they 
don't directly control these moneys. The moneys are given to 
others who then run these programs. And frequently, I have to 
be honest here, the imposition of controls is resisted, even 
within this body, because there'll be pushback from States or 
from counties as to the imposition, say, of penalties. An 
example of that being just now in the farm bill and changes we 
wanted to make in food stamp areas, just the penalty phase; if 
people spent too much money and did not have the adequate 
controls, there's oftentimes a lot of pushback, because if 
you're going to get a penalty, obviously it costs the State 
money.
    It is a very complicated dynamic, and you need to work at 
both the department level but also at the State level, and we 
need your help there because sometimes they don't want to 
cooperate.
    Mrs. Maloney. If I could followup on your comments, that 
one way to address that is to come forward with how we want 
these controls federally. And instead of imposing the penalty, 
say if you want this money within a 5-year period or a 10-year 
period, you implement this type of management control. You 
know, I think sometimes, particularly in serving the poor when 
the need is so much, they are just overwhelmed; people are 
overwhelmed, and they can't really spend the time to think of 
how they could better control it.
    So maybe we in the Federal Government that has more 
experience in controls and oversight could come up with some 
ideas that we could just suggest, maybe instead of a penalty, 
we could put out an incentive; say you correct this in X, Y, Z 
ways, and then we will give you more money.
    Now, very briefly, on the State and city of New York, by 
far the Federal budget goes to the city of New York, not the 
State, because the city of New York serves the--it's where the 
poor live. And it's the urban center of where the population 
really lives. And I was always surprised on the State to see 
how much more money was really in the city on contracts, 
building, Medicaid, Medicare, Social Security than upstate. You 
always think the State is bigger. But as I said, if you wanted 
some model cases or some hearings or some, you know, just some 
thought on how you could do this, I could certainly work with 
you with the city of New York. All 52 members are still friends 
of mine because I served with them.
    Mr. Everson. I would like to do that.
    Mrs. Maloney. Maybe that would be a better way of getting 
that done, as opposed to saying we are going to give you a 
penalty, when most cities and States have a huge budget gap. 
The city of New York has a $5 to $6 billion budget gap. If you 
talk about a penalty, they are going to be upset because they 
need the money. But if it came in in the beginning, not in an 
onerous way, but we will give you 5 years to correct your 
erroneous payment problem by X, Y, Z, they would welcome the 
leadership of how to respond, because no one wants their 
limited dollars being spent inappropriately.
    Thank you.
    Mr. Martin. I believe that many cities continue to fund 
some recipients that are financial basket cases. And I believe 
that if they improve followup of these subrecipients, and 
consider the audit findings in future awards, that would reduce 
the findings considered in the single audit process.
    Ms. Thompson. I'm from GAO, Mr. Congressman; nice to have 
you here; nice to be here today. One of the things that I 
mentioned in my remarks before you came in was that I felt 
there was a real need for the States to report on the 
subrecipients, because the Federal agencies are not getting the 
information on the audit findings of these subrecipients. I'm a 
firm believer that by reporting, you increase accountability. 
But more than that, you could do analysis. The Federal agencies 
then can look across the subrecipients and see where the 
problems are.
    For instance, we've seen a lot of audit findings in 
eligibility, and you take that down to an individual program 
then, and if you see that prevalent across many States, you 
need to then look at what is the reason that they're finding 
audit problems in eligibility? It allows that kind of analysis. 
Right now, the States are not reporting up on who the 
subrecipients are, nor are they reporting up on what kind of 
audit findings are being identified out there by the audits and 
what kind of followup actions are being taken to correct those 
problems. Even though those audits are in the clearinghouse 
data base, that information is not going out to the Federal 
agencies.
    And I think if we had, again as you mentioned, a 
partnership among everybody within the State up to the State 
level, and then the States with the agency level, we could 
increase our accountability but, more importantly, give them 
the information they need to do this kind of analysis.
    Mrs. Maloney. Thank you.
    Mr. Miller. Thank you. Let me ask some questions of Mr. 
Everson, and I know he has to leave early. Three questions I 
will ask you, and then you can cover them all at one time.
    The GAO report issued today raises questions about the 
adequacy of agency efforts to ensure that recipients of Federal 
awards are correcting weaknesses identified in the single audit 
reports. What is the OMB's role in ensuring that the weaknesses 
are corrected?
    A recent GAO survey indicated that agency quality control 
reviews have found problems with the quality of some single 
audits. The question is, how pervasive is this problem?
    The third question is, what is OMB doing to ensure that all 
required single audits are being performed?
    Mr. Everson. Taking the first one, as I indicated before, 
the President has articulated improving financial management as 
one of the five governmentwide efforts that we are undertaking 
as part of the President's management agenda. This is a very 
central element of it, reducing erroneous payments, so we take 
very seriously the work that GAO has done here in looking at 
the efforts, really, of the departments which control the 
largest pieces of this $300-some-odd billion of grants that are 
out there.
    We have concerted efforts, working with the departments, to 
increase our monitoring of what they're doing in this area, and 
as you may know, we are evaluating their progress quarterly. In 
fact, we will be updating our management--executive branch 
management scorecard on where each agency stands, their efforts 
in this area; and, for instance, be giving my colleague here, 
Jack, a grade on how the Education Department is doing on 
improving financial management.
    That will be published and be available to everybody on 
July 15th when we do the midsession reviews. So there is a 
great deal of accountability and a great deal of focus on this 
whole effort. And it will take into account things like GAO 
reports on this area. So that's the first question. I think it 
is receiving the attention it needs and will be highlighted.
    The quality of the audits. I think that as several people 
touched on, I don't think we really know as well as we should 
just whether the audits themselves are of the standard across 
the board that we would want, the points that were made about 
the involvement of the inspectors general and also, I would 
think, the CFOs that get a clear view of this, they're central. 
We need to do more in terms of the sampling of the audits, more 
peer reviews.
    I think the PCIE, which is the group of IGs and the audit 
committee that was referenced, they're working on this. We are 
working on this with them. But I think we do need to do more. 
And as I indicated before, this is a tough time to be in the 
audit business. They're in for a lot of criticism in the work 
that's being done in the private sector. We need to make sure 
that we have very high standards here. So I think more needs to 
be done and we will do that.
    I am the acting chair of the PCIE, and I will make sure 
that I reiterate that as we work on that on the IG side.
    Help me again on the third question?
    Mr. Miller. What are you doing to ensure that all required 
single audits are being performed?
    Mr. Everson. I think that is, again, an active area of 
collaboration amongst the bodies that we have in place. And 
there is a grants subcommittee that works within the CFO 
Council structure and works directly--we have a lot of 
coordination on this--with GAO and with the departments through 
the CFO Council. But I think that, as was mentioned earlier, 
that--I think you used the word ``honor system.'' I don't think 
we have quite figured out a foolproof way here to make sure 
that everybody who should provide an audit is so doing. That 
remains to be seen how we would make that air-tight.
    Again, though, I think that we are picking up, we are 
sweeping in the big-dollar items, as I indicated before. The 
exposure here may be on some of the smaller grantees, is where 
I think there is probably greater risk.
    Mr. Miller. Let me ask about the Federal Financial 
Management Improvement Act. Could you comment on the OMB's 
views of the effectiveness of the Federal Financial Management 
Improvement Act and what action is being taken to address the 
continuing poor condition of the financial systems across the 
government?
    Mr. Everson. I think that the act has been very important 
in trying to direct agencies to get to systems that are 
compliant with Federal standards, both as to their own 
individual needs, but moreover to get to a common set of 
transaction processes and standards such that you could 
actually use this information on a central basis.
    As you know, right now we don't have audited financial 
statements for the U.S. Government. GAO can't opine on the 
financial statements of the U.S. Government. Part of this is 
systems driven; that we can't even collect and provide 
information, adequate information on all the intergovernmental 
transactions. You can't get there until you have good systems 
that produce the right information in the right account 
structure.
    Nevertheless, having said that, as we move forward to 
improved systems across the government, and invest to do that--
and there is a great deal of modernization that is going 
forward right now that's very good. There is a problem, I would 
suggest to you, with the act as you look at all the reporting 
that takes place under FFMIA, FMFIA, the CFO Act and other 
areas. There is almost a competing hierarchy of reporting under 
these various acts. And we need to be, I think, taking a look 
at this.
    I have talked to the Comptroller General about it, getting 
a better hierarchy of reporting. Because what happens quite 
frankly, sir, is that you end up opining as to compliance with 
FFMIA, and that gives you a series of issues to address, and 
then you've got material weaknesses and FMFIA problems, and I'm 
not sure the agencies know where to turn to--which problem to 
fix first. We need to get a rational system that says we have 
material weaknesses that the auditors have determined which 
would sweep in these FMFIA problems, and work on those, if you 
will. It is a little too complicated out there right now.
    Mr. Miller. One more question of Mr. Everson before you 
leave. It is related to H.R. 4685, the Accountability of Tax 
Dollars Act of 2002. What is OMB's views of H.R. 4685 and does 
it support the bill?
    Mr. Everson. You will have to tell me a little bit more 
about it.
    Mr. Miller. It increases the number of agencies that are 
going to be required to have audits.
    Mr. Everson. OK, great. Yes. Yes. We are for this because 
it brings down--this lowers the threshold and sweeps in some of 
the smaller agencies. We think that is a good idea. They end up 
with their financial statements.
    The piece that I think we have some reservations about is 
really just what I talked about a minute. The FFMIA components 
of that; because it's not totally clear to me in a small agency 
that you should mandate that same adherence as to the technical 
requirements on systems, because those really have a benefit to 
us overall if you want to roll up the information into the 
governmentwide statements. It's not clear that you want--
they've got a system that the auditors would say is adequate 
for their purposes. I'm not sure whether, in a $30 million 
agency or program, you would want to mandate that they go 
through the investment cost of having a system that is actually 
totally in agreement with what we need to roll up the 
governmentwide statements.
    That's the only reservation we have. But we are strongly in 
support of having you test functions attached to those 
agencies.
    Mr. Miller. What is OMB's views on the improper payment 
bill?
    Mr. Everson. If you could tell me--there are a couple of 
different pieces that are moving on improper payments. This is 
the--you're talking about--the bill that's just moving forward 
now, which would really codify the reporting on programs by 
agencies to OMB? Yes, that would simply I think support what we 
are trying to do, and provide tighter deadlines, if you will, 
for us I think. So I think it would help us. Not any different 
to what Jack and his colleagues are trying to do for us. But 
having it in the law, sure.
    Mr. Miller. Mrs. Maloney.
    Mrs. Maloney. I have no further questions.
    Mr. Miller. Mr. Everson, I know you have an appointment. 
This is for Sally Thompson. Two questions: What needs to be 
done to ensure compliance with the Single Audit Act? And how 
effective are the provisions of the Single Audit Act? Is the 
act working?
    Ms. Thompson. I think it's an excellent act. It provides 
the framework to be able to put the proper controls in place 
for the $300-billion-plus expenditures. But there are gaps and 
holes, some of which we have recommended in the report that we 
are releasing today. Certainly adding more accountability in 
terms of, at the agency level, the rollup to the top management 
of the overall process and situations of a single audit 
finding; what kind of management decision memos have been 
issued; are they done on a timely basis; what are the 
conclusions on that? Have the recipients been notified and what 
is the timetable for followup on that? Not only that, it 
provides agencywide analysis to be able to understand what's 
going on out there in the area of grants and awards across the 
board.
    We also feel, though, that there are a number of other 
areas at a governmentwide level that need to be addressed, many 
of which have been mentioned here today. We are concerned about 
the universe--that we don't know whether we are receiving all 
the required single audits. It's an honor system. We believe 
that's solvable. If you roll up that kind of information at the 
agency level, you ought to then be able to roll it up at the 
governmentwide level and be able to track it, accumulate it, 
look at it, understand this recipient that may be getting money 
from several different agencies that would fall under the 
requirement, even with the increased threshold of a single 
audit. It would provide you that kind of information.
    Also in terms of what they call the cognizant agency, which 
are an agency that's responsible for following up on single 
audit findings that may involve money from other agencies. I 
think holding them accountable will increase the effectiveness 
of the act.
    And then as we mentioned, we really believe there should be 
State reporting--that's not occurring right now--that goes up 
to the agencies, that identifies who those subrecipients are. 
Then you can go into the data base and see if those recipients 
are actually filing reports. Because right now, all the 
clearinghouse can do is to look at those that filed last year 
to see whether they filed this year. But if nobody's filed at 
all, they do not know that. So State reporting would provide a 
number of solutions to many of the problems that have been 
mentioned here today: who the subrecipients are, how much money 
they're spending. Also we don't know how much the corporations 
are getting of these awards as well, and that would identify 
that. And then we think the quality needs to be addressed to 
make the act more effective.
    And there again, as we said, we really don't know the 
extent of those problems out there. And we think by 
partnerships with the IGs, and the State auditor being directed 
from OMB, would significantly give us the data that's needed to 
identify whether there is a problem with the quality of the 
audits out there.
    I'm also a firm believer of performance accountability. We 
are holding the Federal agencies accountable for the programs 
and the performance and the results of those programs. I think 
that the agencies should hold the recipients and the States 
should hold the subrecipients also accountable for the results 
of those programs.
    Mr. Miller. Thank you. Let me ask Mr. Knickerbocker a 
question. I think we met before on census issues. Mrs. Maloney 
and I chaired that committee for a few years. What type of user 
feedback information does the clearinghouse accumulate, and 
what could improve the quality of the clearinghouse?
    Mr. Knickerbocker. Well, Mr. Chairman, we do have the 
Single Audit Act user group. We interact with all the Federal 
grant-making agencies. The features of the clearinghouse, both 
the data dissemination system and the data collection system, 
have been crafted in part on the basis of the guidance from the 
user community. In other words, we are quite sensitive that the 
mechanics by which we receive the information, make it 
available to the agencies, respond to their needs.
    So I think that we can say that we do have an active 
program of interaction with the Federal agencies. We have 
training programs for the Federal agencies to know how to 
access the clearinghouse. We are, as I indicated in my 
testimony, working with subsidiary groups of the CFO Council on 
issues of delinquent audits, how to increase responsiveness 
from delinquent audits. I did not mention it in my testimony, 
but in part of my written testimony, that we're also working 
with the CFO groups on checking the results in the 
clearinghouse against the three different Federal payment 
systems. I mean, the whole system is quite complex, and one of 
the issues is if you look at various ways that moneys move out 
to local entities, nonprofit entities, by comparing those money 
flows with the auditing flows, can you find discrepancies and 
therefore identify organizations that are not reporting and not 
fulfilling their auditing responsibilities?
    So I suppose my general response is that we see ourselves 
as a service organization meeting the needs of the program 
agencies. I think the record will show that we've been 
responsive to their needs and I'm not aware that, any of the 
agencies feel that there are major shortcomings in what we are 
doing at this juncture.
    Mr. Miller. Thank you. Mr. Hinton, what are some of the key 
issues that need to be addressed to ensure quality and 
usefulness of audits? And in your testimony you mentioned that 
a few States are opposed to the single audit threshold. Can you 
elaborate further on their concerns?
    Mr. Hinton. With regard to improvement in single audit 
quality at the local and the nonprofit level, our position 
would--would involve an increased accountability effort on the 
part of the IGs, on the part of State auditors, to review these 
reports for compliance with the significant sections of the 
act. We've been very successful in Georgia, on the local 
government side, recently in identifying deficiencies in the 
act and thereby being able to--to implement some methods for 
improving that.
    One thing we also see at the local level is a lack of 
education or lack of awareness of the specific aspects of the 
Single Audit Act. And that's a twofold problem in that the 
entity which is obtaining the audit has a responsibility under 
Circular A-133 to engage a competent auditor. And what we see 
there is quite often there's a lot of shopping that goes on 
with regard to selection of the auditor, and less of a concern 
about the quality of the audit that's going to be addressed 
there.
    Mrs. Maloney. Excuse me. May I ask a question? How are they 
able to shop who the auditor is?
    Mr. Hinton. Well, I shouldn't say ``shop.'' The attitude is 
to get--meet the minimal requirements of Federal regulation, 
Federal law, at the lowest cost. And the auditees need to pay 
more attention to the qualifications of that particular----
    Mrs. Maloney. In other words, the city or State can select 
the auditor? I thought the auditors came down from the Federal 
gentleman.
    Mr. Hinton. No, ma'am.
    Mrs. Maloney. So they hire them from outside firms?
    Mr. Hinton. Right. There are a variety of situations across 
the country. I know in our State----
    Mrs. Maloney. What's your State?
    Mr. Hinton. Counties--Georgia--counties and municipalities 
are required by State statute, and obviously by the Single 
Audit Act, to obtain an audit that meets the requirement of the 
legislation and the implementing regulation. And it's the 
responsibility of who receives the Federal funds or expends 
those Federal funds to obtain that audit.
    Mrs. Maloney. Then they go to a private firm? I did not 
think that--I thought the auditors came down from the IG or 
from the government. I did not realize it was private auditors.
    Mr. Hinton. No, ma'am.
    Mrs. Maloney. How do we know that the auditors are right? 
We had the same problem with Enron.
    Mr. Hinton. It's not been a good year for auditors.
    With regard to the change in the threshold, there are 
certain States which have linked the requirements for their 
State's monitoring efforts of State grants and such to the 
Single Audit Act. And under the Single Audit Act, a portion of 
that audit can be paid for with administrative dollars of the 
various Federal assistance programs.
    By raising the threshold, certain States are concerned that 
participation in obtaining the audits might not be available, 
that it would drop off a number of their entities which are 
tied in their statutes to audit requirements.
    However, those States which raised objections to that were 
limited, and surveys we conducted over the last 2 years have 
indicated favorable support for the $500,000 level.
    Mr. Miller. Mr. Martin, how would the increase in the 
single audit threshold impact Education's oversight in 
monitoring school districts?
    Mr. Martin. I don't think it would change the way we 
monitor school districts. I think the procedures we have in 
place right now, CAROI and the other ways we receive our audit 
reports, the fact that we're implementing a new data base, 
should help. But I don't think the implementation of the 
$500,000 threshold will effect us at all. You know, the 
capabilities of our systems are not a function of what that 
threshold is.
    Mr. Miller. As an appropriator I find this whole question 
very interesting, since I'm on Labor-HHS in particular.
    This is for Ms. Hanson. What impact will an increase in the 
audit threshold have on HUD's monitoring and oversight of 
housing authorities that receive Federal financial assistance? 
And HUD recently reported $2 billion in net improper payments 
in housing subsidy programs. Has the Department used single 
audit results as a tool to determine the risk areas in the 
housing programs and, if so, how?
    Ms. Hanson. Thank you. I will take the first one, and you 
will have to remind me of the second one. The impact on 
changing the threshold for the Public Housing Agency is not 
going to be significant. Currently 1,173 PHAs fall below the 
$300,000 threshold, and they have total Federal revenues of 
approximately $141 million. Those that are in the neighborhood 
of $300,000 to $500,000 it's another 304 PHAs with about $118 
million. That still leaves 1,627 PHAs with over $500,000, for 
$13.6 billion in Federal revenue.
    You weren't here with the earlier question, but we will 
still receive the unaudited financial submissions from those 
housing authorities, so we will have the opportunity to be 
looking, and make an assessment of their financial condition 
based on those unaudited financial statements.
    We don't believe by raising the threshold, it will impact 
our ability to continue our oversight of those housing 
authorities.
    And the second one was----
    Mr. Miller. About the $2 billion that's been reported in 
improper payments in the housing subsidy programs. Has the 
Department used single audit results as a tool to determine the 
risk areas in the housing programs and, if so, how?
    Ms. Hanson. Not directly. How we analyze risk assessment in 
the Office of Public and Indian Housing is we look at a variety 
of features, including the amount of Federal resources going to 
that housing authority, performance under the PHAs system, and 
compliance issues such as audit findings to determine where we 
believe there is a high-risk housing authority that needs our 
attention either through additional technical assistance, 
greater monitoring of the documents that come in, or actual 
onsite attention.
    I'm not really prepared to speak to what the Department is 
doing, but we do have a very aggressive program of trying to 
work up front with the housing authorities and other housing 
providers to assist them in validating the information that 
residents and potential residents provide.
    Mr. Miller. Thank you. Well, this will conclude the 
hearing. But let me for the record make some thank-yous to 
several people that made this hearing possible:
    Russell George, the staff director and chief counsel; 
Bonnie Heald, the deputy staff director, Henry Wray, the senior 
counsel; Rosa Harris, the GAO detailee; Justin Paulhamus, the 
majority clerk; Michael Sazonov, the subcommittee intern; 
Sterling Bentley, the subcommittee intern; Joe DiSilvio, the 
subcommittee intern; and Yigal Kerszenbaum, subcommittee 
intern.
    For the minority, David McMillen of the professional staff, 
and Ellen Rayner, the chief minority clerk. I thank the 
reporters, Michelle Bulkley and Joe Strickland.
    With that, I thank you all very much for participating. I 
am sorry that Chairman Horn couldn't remain for the whole 
hearing, but I thank you very much.
    [Whereupon, at 11:40 a.m., the subcommittee was adjourned.]

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