eral Accounting Office the supervisory review of the administration of the revenue laws; and,

3. The General Accounting Office does not have authority to analyze management discretion in the collection of revenue. We agree that under 26 U.S.C. 6406, we have no authority to review individual tax matters for the purpose of substituting our judgment for that of IRS. In conducting audits of IRS, we would not be concerned with the settlement of individual tax matters. Our authority to audit, as distinguished from our authority to settle claims and accounts, is clearly set forth in the law.

Section 312(a) of the Budget and Accounting Act, 1921, provides that the Comptroller General shall investigate all matters relating to the receipt, disbursement, and application of public funds, and that he shall make recommendations to the Congress looking to greater economy or efficiency in public expenditures.

Section 117(a) of the Budget and Accounting Procedures Act of 1950 reaffirms this authority with the added authority for the Comptroller General to determine the principles and procedures to be used in conducting such audits.

I should point out that the language of section 117(a) provides that "except as otherwise specifically provided by law," the financial transactions of the agencies shall be audited by GAO in accordance with such principles and procedures and under such rules and regulations as may be prescribed by the Comptroller General. The only specific exception provided by law which applies to IRS, 26 U.S.C. 6406, is a narrow one which makes the findings of fact and decisions on claims under revenue laws exempt from GAO review.

We audit and report to the Congress on many Government activities, notwithstanding the fact that final settlement authority is lodged with the agency being audited. The primary purpose of auditing by GAO is to provide independent and objective evaluations of how well agencies are carrying out their responsibilities, to make recommendations for improvements if needed, and to provide other information for the Congress to use in carrying out its legislative and oversight responsibilities.

In performing an audit of IRS, we would not be concerned with the identity of an individual taxpayer, nor, as stated above, would we impose our judgment upon that of IRS in individual tax cases. We would examine individual transactions on a sample basis and only for the purpose of evaluating the effectiveness of IRS operations and activities.

The argument is made by IRS that the Congress has given the Joint Committee on Internal Revenue Taxation rather than GAO the supervisory review of the administration of the revenue laws. The Joint Committee was established by the Revenue Act of 1926, 26 U.S.C. 8001-8023, and its statutory functions include the investigation of the administration of taxes by IRS and the investigation of measures and methods looking forward to simplification of the tax law. We see no basis for the argument that the establishment of the Joint Committee preempted the field in the review of IRS. Certainly the law does not specifically indicate such preemption and, parenthetically, it has never been argued that the leigslative oversight of the depart

ments by the standing committees of the Congress precludes GAO review of the activities of such departments.

It is also argued that GAO does not have the authority to analyze the exercise of management discretion in the collection of revenue, based on the premise that when enacted, section 206 of the Leigslative Reorganization Act of 1946, 31 U.S.C. 60, provided for a GÃO "expenditure analysis" rather than an "administrative management analysis" that was provided for in the Senate-passed version of the bill. It is clear that the language enacted was designed to broaden GAO review and it does not in any manner preclude GAO audit of IRS. In fact, section 312(a) of the Budget and Accounting Act of 1921, mentioned earlier, countemplates management-type audits when it speaks of application of public funds, and economy or efficiency of public expenditures.

The legislative history of the 1921 act clearly supports this interpretation. Supplementing the 1921 act is section 204 of the Legislative Reorganization Act of 1970, which provides that the Comptroller General shall review and evaluate the results of Government programs carried on under existing law.

We are convinced that the differences between IRS and GAO are at an impasse and that enactment of S. 2352 will resolve the matter. The provisions of the bill are similar to those developed by the GAO, IRS, and the House Subcommittee on Commerce, Consumer and Monetary Affairs, in connection with revision of H.R. 8948, which is presently under consideration by the House Committee on Government Operations.

We believe it important that the right of GAO to review the operations of IRS and of the Bureau of Alcohol, Tobacco, and Firearms be clarified in order that GAO can perform independent reviews under its own initiative or at the request of congressional committees and subcommittees.

We, therefore, strongly recommend that S. 2352 be given favorable consideration by your committee and by the Congress.

Senator METCALF. We have had past hearings and past discussions on this question. Since S. 2418 treats a related matter, would you go ahead and give us your report on that bill, too?

Mr. STAATS. All right.

S. 2418 would amend the Accounting and Auditing Act of 1950 to require the Comptroller General to make annual audits of the Federal Reserve Board and the Federal Reserve banks and their branches, the Internal Revenue Service, the Comptroller of the Currency, and the Office of Alien Property, and to report the results to the Congress. Provision is also made to assure access by the General Accounting Office to the necessary records, books, and so forth, belonging to or used by entities being audited, including reports of examinations of member banks of the Federal Reserve System, and for facilities to verify transactions involving balances and securities held by various depositaries, fiscal agents, and custodians of the Federal Reserve Board and Federal Reserve banks and their branches.

We have assumed that this language would give us access to examination reports of member banks in the custody of the Board or the Reserve banks prepared by bank examiners of the Comptroller of the

Currency, the Federal Deposit Insurance Corporation, and the various States as well as those of the Federal Reserve banks.

We are not, therefore, suggesting any change in the language of S. 2418 in this regard. We do suggest, however, that the committee report on the bill and make it clear that GAO will be given access to all examination reports, from whatever source, of member banks.

My views on the importance of providing clear legislative authority to conduct audits and investigations of Internal Revenue Service operations are set out fully in my statement on S. 2352. I will, therefore, confine my remarks to the other entities covered by S. 2418.

One of the primary purposes of the Federal Reserve System is the control and regulation of the supply of money and credit. For example, it can expand or contract the supply of money and credit by purchasing and selling U.S. Government obligations.

As of December 31, 1974, the Federal Reserve System owned U.S. securities totaling nearly $86 billion. In view of the very important part the Federal Reserve System plays in the Nation's system of money and credit, we agree that it is highly desirable to provide for adequate audits of the various entities of the Federal Reserve System to enable the Congress to carry out its oversight responsibilities.

With one exception-the audit of procedures to cancel and destroy U.S. currency unfit for circulation-the GAO does not presently have direct authority to make audits of Federal Reserve System entities, although we have, on a number of occasions, assisted various committees of the Congress engaged in particular studies of their own in this

area.

Until 1933, the GAO audited the expenditure vouchers of the Federal Reserve Board but not of the banks. The audits were made because of the ruling of the Attorney General in 1914 that the fund obtained by assessment by the Board from the banks to meet the expenses were public moneys.

The Banking Act of 1933, however, superseded this ruling by declaring that these funds were not to be construed as Government funds or appropriated moneys. With this change, the GAO audit of the Board's expenditure vouchers was discontinued.

In subsequent years, there have been numerous legislative proposals to provide for a GAO audit of the Federal Reserve System. Until last year, however, the GAO maintained a completely neutral position on whether or not we should audit the System, largely because we were well aware that this is an extremely sensitive area, and that there are many who feel that a GAO audit would undermine the independence of the Federal Reserve System with respect to its monetary and credit operations and thus damage the Nation's monetary policymaking system.

We do not agree with this criticism. The bill in no way restricts or dictates the scope of the GAO audit authority, a feature I feel is highly desirable. It leaves us free to carry out our responsibilities in accordance with our usual methods of reviewing operations throughout the Government.

Many of these operations, incidentally, are equally, if not more, sensitive than the Federal Reserve System operations-military assistance, State Department activities, Federal energy programs, to name but a few.

There is no reason to fear in this area that we would interfere with the making of policy determinations because we would not be coming in prior to the making of such decisions. Rather, we would plan to look at the overall financial condition of the System-at its internal controls and auditing practices, and at the machinery and the system by which determinations are made.

The bill provides that the GAO audit would be made under such rules and regulations as we would prescribe. In accordance with our regular policy, any rules and regulations that we would prescribe would specifically require our auditors to review and evaluate the nature and effectiveness of the organizations and systems of internal management control of the several entities of the Federal Reserve System in determining the nature and extent of GAO audit work to be performed.

In particular, we would want to make a comprehensive review of the internal and external auditing already being done. This is in conformity with generally accepted principles of auditing and is also essential in avoiding unnecessary duplication and expenditure of effort.

The reason I mention this point is in recognition that there is some auditing now being done within the Federal Reserve System. It is our understanding that:

A firm of independent CPA's makes an annual audit of the accounts of the Board of Governors and renders an opinion on the Board's financial statements which is included in the Board's annual report to the Congress.

The Board's staff of field examiners examines each Federal Reserve Bank and branch once each year.

The annual examination of the Federal Reserve Bank of New York includes an audit of the accounts and holdings relating to the system open market account and the foreign currency operations conducted by the New York bank under policies of the Federal Open Market Committee.

Representatives of a firm of independent CPA's accompany the Board's examiners on their examination of one Reserve bank each year, to evaluate the adequacy of the examination procedures.

Each Reserve bank has internal auditors who work on a year-round basis. Their work programs are reviewed by the Board's examiners. Except for the opinion of the CPA firm on the financial statements of the Board of Governors which is included in the Board's annual report, no reports on the auditing being performed within the Federal Reserve System are submitted to the Congress, to our knowledge.

In any event, the scope of the System's present internal audits is not adequate to provide the information the Congress needs to have in an opinion. Under our standards for audit of governmental activities, we believe the scope of an audit should include:

1. An examination of financial transactions, accounts and reports, including an evaluation of compliance with applicable laws and regulations.

2. A review of efficiency and economy in the use of resources.

3. A review to determine whether desired results are effectively achieved.

Examinations of financial transactions, accounts, or reports, or compliance with applicable laws and regulations include performing enough analysis and verification work to arrive at opinions as to whether financial transactions are carried out in accordance with applicable legal requirements and are properly accounted for, and whether the financial reports present fairly the financial position, changes in financial position, and results of operations of the various entities being audited.

In reviewing programs for efficiency and economy, our objective is to find out whether the entities being audited give due consideration to conservation of resources and minimum expenditure of effort in carrying out their operations.

That is just simply to say, save money. We are interested in finding out whether there are unnecessary or inefficient or unjustifiably costly procedures, whether there is unnecessary duplication of effort, whether work is being performed which serves little or no useful purpose, whether equipment is being insufficiently used, whether there is overstaffing, and whether there are faulty buying practices which result in paying unnecessarily high prices or just buying too much.

In carrying out this kind of work, we do not undertake to arrive at overall opinions as to whether an organization is operating efficiently and economically, but we do try to identify problem areas and make recommendations for greater efficiency and economy. This kind of audit work also includes determining the causes of any inefficient or uneconomical practices found as a basis for proposing constructive measures for improvement.

In reviewing the results of authorized programs or activities, our primary purpose is to find out whether the objectives contemplated by the authorizing legislation are being achieved. In working with other agencies of the Federal Government, we have gained a great deal of experience in making such reviews, and the Congress has expressed an ever-increasing interest in obtaining reports from us on the results of this kind of audit work.

The most recent general expression by the Congress on GAO auditing is in the Congressional Budget and Impoundment Control Act of 1974 which requires us to review and evaluate the results of Goverment programs and activities carried on under existing law.

Applying these principles of sound auditing practice, there are numerous functions and activities of the Federal Reserve System on which evaluations of results achieved or effectiveness of operations should be made as part of an independent audit by the GAO.

Let me now turn to some of the other specific provisions of the bill.

S. 2416 authorizes the audit of the Federal Reserve Board and the Federal Reserve banks and their branches. It does not mention the Federal Advisory Council and the Federal Open Market Committee. Technically, these entities are not part of the Board or the Federal Reserve banks, but they are nevertheless an important part of the Federal Reserve System.

For this reason, I believe that new subsection (d) (1) should be amended to make the Federal Advisory Council and the Federal Open Market Committee subject to GAO audit as well.

The bill calls for an annual audit as well as an annual report to the Congress. Because of the size and complexity of Federal Reserve Sys