Background The private sector has increasingly come to recognize the positive value of a public audit committee as an instrument of control, as well as a means of enhancing the quality and acceptability of the internal audit process. A basic function of a corporate audit committee is to assist the board of directors in fulfilling its fiduciary responsibility relating to corporate accounting and reporting practices. Another major function of the committee is to maintain a direct and separate line of communication between the board of directors and the company's independent auditors. Through this role of communication, the audit committee develops information on an understanding of company activities which, through their advisory role with the board of directors, can be used to strengthen the board's control of company operations. The OSD Task Force believes that a properly structured DOD audit committee can assume a similar role and improve the overall control of DOD's operations. Findings and Conclusions Most corporate audit committees concentrate their activities on issues related to profitability, such as the company's budget and long-range financial planning. The audit committee provides the company's directors with an independent assessment of overall management efficiency and control. The very complexity of DOD's structure and operations increases the probability of breakdowns in internal control and policy compliance. In DOD, the profitability motive of the private corporation is replaced with the mission of protecting and defending national security in times of peace and war. The DOD Public Audit Committee should focus on internal audit policies and procedures and on mechanisms for internal control which ensure that operating policies are efficiently and effectively carried out. DOD Directive 7600.2 defines the scope of internal audit to include evaluations of the economy, efficiency, and effectiveness with which managerial responsibilities are carried out, including financial, operational, and support activities. DOD has both internal and contract auditors. The DOD Public Audit Committee would be concerned primarily with internal audit. DOD has four internal audit organizations, which collectively are responsibile for auditing all of DOD's operations (i.e., Defense Audit Service, Army Audit Agency, Navy Audit Agency, and Air Force Audit Agency). We recommend that the DOD Public Audit Committee work directly with the Secretary of Defense and the DOD Inspector General. However, given that the internal audit components in the services are separate organizations, it will also be necessary for the committee to interact with the appropriate service audit agency directors. It is our understanding that DOD has numerous standing committees which were formed to coordinate DOD audit and investigative functions. Members on these committees are generally DOD personnel at policy-making levels in the OSD and the services. It appears that due to cross-membership, a major value of these committees is the opportunity they provide for communication among top managers of the various audit groups. This provides some internal coordination among DOD audit groups. To the extent that these groups actually plan the internal audit effort, the Public Audit Committee may determine that it is appropriate to interview committee members on a regular basis. At the same time, members of these groups, like the internal auditors, should have direct access to the Public Audit Committee without going through the Secretary of Defense. The DOD Public Audit Committee should review or offer guidance to top DOD management in the following auditrelated areas: the development and execution of a comprehensive and coordinated long-term audit plan, including the prioritization of audit coverage in high dollar-risk environments such as procurement, inventory management, and research, development, test, and evaluation (RDT&E); the effectiveness of and compliance with DOD policies and procedures at all levels of management; the effectiveness of management controls to the evaluation of internal controls and accom- follow-up of management's implementation of audit. recommendations; follow-up of various commission recommendations directed towards DOD and its operations; the need for updated computer auditing techniques; and the need for increased coordination between the various audit organizations in the selection of audit targets. The benefits of a public audit committee can be farreaching. For one, the committee's role reinforces the internal auditor's independence from management, thereby providing an additional degree of control over operating policies. An audit committee also forces both auditors and management to take a more aggressive approach toward problems that might otherwise go unresolved. The committee's composition of private sector individuals assures the independent point of view that is so crucial to its effective functioning. While a knowledge of business and finance as they relate to DOD activities is a distinct advantage to audit committee members, it is not essential for all members. Audit committee experience would be a helpful criterion for committee membership. The committee composition should provide for diversity in outlooks among members. We recognize that DOD's operations with respect to national security will require that audit committee members qualify for security clearance. However, the purpose of the committee will not be to examine policy decisions with respect to national defense. Rather, as in the private sector, the committee's primary function will be to provide feedback to top management (in this case, the Secretary of Defense) regarding the efficiency and effectiveness of operations overall and the extent to which operational policies are being followed. Recommendations The OSD Task Force recognizes that a public audit committee for DOD would be a unique entity, as no other Federal agency uses a private sector group in such a manner. The fact that we recommend such a committee only for DOD does not mean that we do not feel other agencies would also benefit from such a group. Rather, our focus of study was DOD and our recommendation is constructed accordingly. Legislation would be required to form an advisory group to the Secretary of Defense which is composed totally of members from outside the DOD. Based on our knowledge of the operation of public audit committees in the private sector, we recommend that the legislation include the following provisions. OSD 36-1: The President should appoint an audit committee for DOD consisting of seven leaders from the private sector, with no more than four from any one political party. The committee members should serve for one term of six years and should not be reappointed unless the initial appointment was to fulfill an unexpired term of less than three years. Initially, the President should appoint members as follows: three members for six years; two members for four years; and two members for two years (eligible for reappointment). Thereafter, all terms would be six years, except in situations where an unexpired term is filled. Anyone having served in DOD in the previous five years would not be eligible for membership on the audit committee. Members would serve without pay. The primary duties and responsibilities of the audit committee would be defined as follows: O O The committee would be required to meet formally at least four times a year and submit a report of each meeting to the Secretary of Defense. Meetings could be scheduled at any other times deemed appropriate by the committee. The committee, on an individual or joint basis, would be accessible, through OSD, to receive reports, suggestions, questions, and recommendations from internal auditors and financial officers of DOD. The committee would review the duties, responsibilities, and activities of the Inspector General's Office of DOD, other OSD-level organizations with internal audit responsibilities, and the respective service audit agencies. The committee would review periodically, with appropriate DOD personnel, management's plans and procedures to assure compliance with DOD policy and performance thereunder. The committee would review selected accounting policies. The committee would meet with the Secretary of Defense semi-annually to report on findings and recommendations developed through the audit pro cess. Savings and Impact Analysis No immediate savings are quantified. Implementation DOD should seek legislation to establish a Public Audit Committee as discussed above. II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D) F. FINANCIAL ISSUES (CONT'D) OSD 37: PROCUREMENT AUDIT SERVICE Summary Recommendation The Department of Defense (DOD) should establish a central audit group, the Procurement Audit Service, with responsibility for internal audit of all DOD procurement practices. The Procurement Audit Service should report to the DOD Inspector General. Financial Impact $500.0 million annually Potential Savings: The financial impact of this recommendation is very difficult to There may be some implementation cost, not quantified here, to the extent that additional personnel are required to handle assignments previously performed by auditors. In light of the authorization of 100 new spaces for procurement auditing in the FY 1983 budget, and the transfers proposed herein, further additional personnel may not be required. |