I was delighted to see that they agreed across the board that officials must make that decision after hearing from local citizens and groups. Mr. CORREIRA. Mr. Chairman, I would like to make a remark relative to what you said. Some of the comments that we heard in checking out the participation requirements, from groups and individuals, were that they preferred to let their elected officials know what their interests were prior to the public hearing, that this was more effective.

Mr. FOUNTAIN. In some cases they do that. For example, I am a constituent of a lot of local public officials. I have not had too much success with getting some things done that I think ought to be done. Occasionally, I picked up the telephone and called the person who represents my ward. I know a lot of other people that do the same thing. Sometimes this turns out to be effective and accomplishes the same purpose as a public hearing.

Mr. STAATS. It is not either or. I think it is both.

Mr. FOUNTAIN. This is my last question since we have other witnesses.

On page 6 of the GAO report entitled "Compliance With Requirements to Hold Public Hearings on the Use of Revenue Sharing Funds," you call attention to a Missouri village which decided to withdraw from the program and to give up its annual entitlement of about $1,100 because it no longer needed the funds. Are you aware of any other examples of this kind?

Mr. CORREIRA. No; we are not, Mr. Chairman.

Mr. FOUNTAIN. Thank you very much, Mr. Staats. I thank you and your colleagues for an extremely informative and comprehensive statement to begin with. It was a thought-provoking one and contained some useful suggestions. I hope our staff and your staff will be able to get together and come up, in those areas where there is concern, with something worthwhile. Maybe we need to make some changes. We appreciate your coming.

Mr. STAATS. Thank you very much.

Mr. FOUNTAIN. Our next witness is a man whose name is not unfamiliar in this subcommittee, James R. Fountain, Jr. He is city auditor of Dallas, Tex., and is representing the Municipal Finance Officers Association.

I might say that in some of my travels I used to look up the name Fountain in the telephone directory. In many places I never saw it. But in recent years I have discovered that there are a few Fountains in a lot of places.

In my own State I found three sections where there are groups of Fountains.

It is nice to have you with us, Mr. Fountain.

STATEMENT OF JAMES R. FOUNTAIN, JR., CITY AUDITOR, DALLAS, TEX., REPRESENTING THE MUNICIPAL FINANCE OFFICERS ASSOCIATION

Mr. J. R. FOUNTAIN. Thank you, Mr. Chairman, and members of the subcommittee. I am James R. Fountain, city auditor for the city of Dallas, Tex. I am testifying on behalf of the Municipal Finance Officers Association. With me is Donald Beatty, the executive director of the Municipal Finance Officers Association.

We of the MFOA, as strong supporters of the general revenuesharing program and advocates of continued improvement in financial reporting and auditing, appreciate the opportunity to present the views of State and local government finance officials throughout the United States to this committee.

To us, general revenue sharing is the centerpiece of the Federal grant-in-aid effort. It is our opinion that the general revenue-sharing program has met critical needs of State and local governments during a time of high inflation and increased fiscal stress.

It has helped to reduce our dependency on property taxes and provided an essential discretionary funding source to assist us in meeting specific high priority needs of our widely different communities. It has helped our governmental unit to continue to provide satisfactory levels of essential services and maintain our infrastructure-streets. storm sewers, police facilities, et cetera-during very trying fiscal times.

Our purpose today is to indicate our continued strong support for general revenue sharing and to provide information that we believe will be important to you in considering certain features of the program.

Since 1976 and the enhancement of the audit requirement of general revenue sharing, we believe that significant improvements have been made in governmental accounting, auditing, and financial reporting. We believe these represent only the initial steps in a continuing process that is rapidly gaining momentum and support.

It is evident that the general revenue-sharing audit requirement has been a major contributor to the process. Also, the increased involvement of professional accountants, CPA's, academicians, and investors in municipal securities have increased overall awareness and support for needed improvements.

The efforts have resulted in considerable progress which, if properly nurtured and supported, can lead to meaningful solutions to many of the issues currently confronting us in State and local government.

State and local governments have, we believe, felt the need to comply with the requirements of the General Revenue Sharing Act and have initiated improved accounting and reporting systems and efforts to assure that quality audits are being performed. In fact, it is our understanding, which was confirmed by the Office of Revenue Sharing this morning, that almost all of the required 11,000 State and local governments have submitted either audit reports or their plans for completing the audit.

We believe this is firm evidence of the good faith of our efforts to comply. This is not, however, meant to lead you to believe that we are completely satisfied with the current state of auditing, accounting, or financial reporting. We recognize that much is left to be accomplished, especially in improving the quality of governmental auditing and financial reporting.

The Municipal Finance Officers Association has, since its inception, been a strong proponent of accountability in government. We strongly support the use of annual budgeting and annual financial reporting based on sound accounting principles designed to provide users with information necessary to ascertain if the governmental unit is meeting its stewardship responsibilities.

An important part of this is the independent annual audit of financial statements. We therefore find ourselves in the somewhat difficult position of testifying against the expansion of the general revenue sharing audit requirements yet favoring the annual audit ourselves. However, we believe that there are extenuating circumstances surrounding the issues that indicate that there may be other, more effective alternatives in accomplishing what both the MFOA and the subcommittee desire-improved accounting, auditing, and financial reporting for government.

It is our belief that the efforts currently in progress are having a meaningful impact and that the imposition of an annual or even a biannual audit requirement at this time would not be in the best interests of either the Federal, State or local governments.

Our reasons for this belief follow:

First: The current requirement has been interpreted as requiring an audit at least every 3 years. That is being met by a large portion of the 11,000 affected governments. However, this is causing a serious drain on available audit resources.

A more stringent requirement would be likely to severely tax the ability of many jurisdictions to comply with the law.

Second: A further increase in resources allocated to the auditing of financial statements would, in our opinion, reduce the audit time available for audits of economy, efficiency, and program results of governmental programs. Since governmental units do not operate in an efficient competitive market and do not have readily measurable performance indicators such as net income or earnings per share-analysis and audits that extend beyond the scope of the traditional financial audits are vital.

A shift of resources from these audit efforts would be detrimental to the performance and productivity of governmental units, in our opinion.

Third: We believe that beyond a certain minimal level of mandatory compliance, it is often more effective to use incentives and other less drastic methods to encourage improvements. It would appear to be more effective at present for some form of positive economic incentive to be offered to governmental units to encourage them to provide audited annual financial reports.

Fourth Efforts now, we believe, need to be aimed at improving the quality of reports being submitted, not necessarily increasing the quantity of the reports. Although significant improvements have been made in the quality of government financial reporting, there is still the need for further enhancement and attaining compliance with generally accepted accounting principles.

As an alternative, we believe that the use of the independent statewide commissions should be considered. The commissions, included in early drafts of the administration's reauthorization message would address two fundamental sources of local fiscal problems, one of which is improved financial management practices. We believe that such statewide commissions which would address the areas of accounting, auditing, and financial reporting could effectively bring about a significant number of improvements for State and local governments. As professional finance officers, we would naturally like to see State and local governments audited on an annual basis, according to gen

erally accepted auditing standards, and for our governments to follow generally accepted accounting standards, as promulgated by the National Council on Governmental Accounting.

However, we feel that statewide commissions should focus on bringing about the changes and could produce a significant number of improvements in the financial management practices of State and local governments without the possible adverse consequences of a Federal mandate.

Mr. Chairman, we also believe that the audit requirement of the general revenue-sharing program cannot be considered in isolation from other Federal mandates. Specifically, we are concerned with the overlapping and duplicative audits which are mandated by all other Federal programs. Thus, the subcommittee is encouraged to focus its efforts on strengthening the single audit concept that Comptroller General Staats mentioned and providing for the coordination of financial reimbursements for the audits.

We hope you will appreciate our very strong desire to bring about improvements in State and local government accounting and auditing. We feel that constructive improvements by the Federal Government could now most meaningfully focus on the single audit concept rather than on increasing specific programmatic audit mandates which, in the end, could be counterproductive.

In closing, the MFOA would like to emphasize that the reauthorization of general revenue sharing as an entitlement program is important to both State and local governments. Thank you, Mr. Chairman.

Mr. FOUNTAIN. Thank you very much, Mr. Fountain.

I would like the record to show that Mr. James R. Fountain, the city auditor for Dallas, is accompanied by Mr. Donald W. Beatty, executive director of the MFOA. We are also delighted to have you here.

Without objection, the written statement you have submitted will become a part of the hearing record.

[See p. 202.]

Mr. FOUNTAIN. I am pleased to hear that your organization has found the auditing requirements of the 1976 revenue-sharing amendments instrumental in improving the quality of auditing and accounting in the State and local government sectors. I must confess, when we passed it, I had some reservations about calling for an audit of all the expenditures when they might not necessarily involve revenue sharing. However, since we lifted all restrictions and said, "You can spend the money any way you want to," we had to do this. I am delighted that it has improved the auditing and accounting processes.

At present, ORS regulations require an independent financial audit for only 1 out of every 3 years. This, I might add, is contrary to what I believe Congress intended. I believe I stated earlier, when Mr. Staats was here, that the Congress intended an audit of all the government's operations at least once in 3 years, but covering all 3 years.

If it is going to cover all 3 years, it would almost have to be the last year. To audit only 1 year in 3 would appear to be an open invitation. for a dishonest State or local official to bury fiscal irregularities in the nonaudited years. I do not see how occasional auditing of that kind can provide any assurance to the public that a government's financial accounts are satisfactory. Yet, I must confess, I favor elimination of unnecessary paperwork and unnecessary labor. I think the important

thing is that we have quality in what we do and eliminate all of the unnecessary burdens so that the funds are really spent for the purposes for which they are intended, not for a lot of ancillary redtape.

Does your statement, Mr. Fountain, on page 7, in which you oppose an annual audit requirement, also apply to an audit once in 3 years covering all 3 years?

Mr. J. R. FOUNTAIN. There is a great deal of similarity between an annual audit and an audit once every 3 years covering every 3 years. In fact, as an auditor myself-my job is internal and we do grant auditing as well for the city of Dallas for the Department of Labor— we find that by going back and trying to audit multiple years, you run into many problems. Records many times cannot be found at the end of the first year.

Many times improper practices, if they are not caught in the first year, continue and tend to aggravate themselves. We find that there is difficulty in auditing multiple periods of time. For our work on the CETA program, for example, we are right now doing a current audit approach. We audit during the actual year of the grant.

Therefore, I do not, from my own standpoint as an auditor, see much difference between an audit covering a 3-year period or an annual audit. I would probably prefer to have an annual audit if I were doing it myself. I think the question of using either one would result in setting priorities for the use of resources. I think our reason for not wanting a Federal mandate, even though we at the city of Dallas and most governments in Texas do have annual audits, is that we do not want to see resources mandated to a use that may not be the highest and best use of those resources.

Mr. FOUNTAIN. As you can well understand, when we are dealing with big cities, big counties, and also very small units, it is awfully hard to develop a formula requirement that is completely equitable for all. I think that was one of the problems we were confronted with.

I think you are quite right. It is much easier to do an annual audit because at the end of the third year, especially at small operations where they do not have adequate personnel, they may well have lost many of the things that they need in order to prepare the audit in the third year.

I take it that it is not your view or the view of the association that auditing a local government's accounts for only 1 year every 3 years meets the test of generally accepted auditing standards.

Mr. J. R. FOUNTAIN. Let me try to explain. When referring to generally accepted auditing standards, they refer to the method and the practice of doing the audit itself. They do not refer to how often an audit is performed. There is a difference between the two.

In other words, I can do an audit every third year in a jurisdiction. I would have to go back and test the account's balances at the beginning of the year to make sure that they are correct, as well as at the end of the year, because I need to know that all of the transactions during the year are properly recorded. Therefore, there is additional work in doing only 1 year out of 3 over doing just 1 year in 3, but I can do an audit in accordance with generally accepted auditing standards and cover only 1 year out of a 3-year period.

Mr. FOUNTAIN. You will agree that if, as a public official, I wanted to spend some money for ultra vires purposes, I would pick the year not covered by an audit. Would you not?