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Should the revenue sharing audit requirements incorporate the single federal audit concept?

audit

law

The revenue sharing act specifically provides that, "an conducted in accordance with the provisions of any federal

...

shall be accepted" (section 123, (c), (6)), provided it

complies with the revenue sharing audit requirements. There is no evidence that this provision has been used to date, probably because no other federal law requires a complete financial audit of a state or local government, as well as a compliance audit. In fact, most federal programs require audits limited to the handling and use of only federal money.

It is estimated that 14 federal agencies have issued 80 audit guides concerned with specific program areas (Gary, p. 390). Needless to say, for state or local governments with large numbers of federal grants, this creates considerable confusion and complexity in accounting and auditing them.

The simple solution that has been endorsed in principle by virtually everybody that has focused on the problem, is to have a single financial audit of each recipient government, accompanied by an audit to insure compliance with all federal grant requirements. The House Committee on Government Operations reported on November 1, 1979 that, "Auditing of federal grants is haphazard and ineffective."

It went on to recommend that, "The Director of the Office of Management and Budget should provide for prompt implementation of the single audit concept ..."

The obvious vehicle for such a single audit for general

purpose governments is the already existing comprehensive financial audit required by general revenue sharing. Despite the problems that have been encountered in implementing the 1976 amendments, the revenue sharing effort is further along in getting the covered governments to a full audited position, then is any other federal program. If, as has been suggested earlier, the revenue sharing audit is required annually and is performed fully in conformity with accepted auditing standards, then it would seem a relatively simple process to extend the requirements to cover a test of compliance for all federal grants received by the government.

As the Committee on Government Operations observed, ".... single, coordinated audits on a government-wide basis should significantly improve the resource situation. It will eliminate wasteful duplication and require fewer audits to plan, perform, and report on audits of large, multifunded grant recipients. the same time, it would provide a better look at the grantee's overall performance."

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In view of the general agreement on the need and advantages of a single audit, the revenue sharing act should go beyond its present consent to a single audit, and should provide for adding the auditing requirements of other federal programs to the revenue sharing audit. This might be accomplished by explicitly stating in the revenue sharing act that the revenue sharing audits will constitute the single audit for all general purpose state and local governments.

Elmer Staats, the Comproller General, recently endorsed such a change in his March 20, 1980 statement before the

Senate Subcommittee on Intergovernmental Affairs, (p. 16).

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Should the audit requirements be extended to recipients of less than $25,000 annually?

The 1976 decision to limit the applicability of audit requireto larger governments

ments was a wise one in view of the implementation problems that

have been encountered.

It reduced the coverage from over 38,000 units

of government to less than 11,000. However, the logic of excepting 27,000 recipients, other then for practical reasons, is unclear

and should be reconsidered.

There is no evidence to show that

small units are less inclined to misuse of funds than large units. In fact, because such smaller governments are often administered by part-time or less skilled officials, there may be more potential for inadvertent misuse of funds. Larger governments have extensive experience with federal requirements for Davis-Bacon, civil rights compliance, and grant accounting, and may be more likely to comply with these requirements as a result.

If the intention is to be less stringent in enforcing

compliance on smaller governments, then it might be better to amend the law to require less rigid compliance by smaller governOtherwise, there should be some provision to apply audits to all governments. Because the cost of such audits could become

ments.

excessive for the really small recipient governments, it may be

to

desirable/limit the audits to a ramdom sampling, with the audit

done by Office of Revenue Sharing auditors. A sampling approach would reveal the extent to which such audits are necessary and

desirable, without imposing an unnecessary burden on the smaller

governments.

O Should the audit staff of the Office of Revenue Sharing be increased?

Even

The present authorized audit staff of 25 positions (19 actually filled at present) appears to be inadequate to cope with existing workloads. with all positions filled, it provides only one professional staff person for each 608 governments required to be audited. A staffing ratio this high can permit only a perfunctory office review of audits. While a theory of relying on state and private auditors is good, the revenue sharing audit staff must still assume responsibility for the proper use of funds.

This means,

at the very least, a sample checking of the quality of audit work being performed, including field visits to the governments on a periodic basis. A doubling of the authorized staff would lower the ratio to 304 governments per auditor, and could provide greater assurance that effective audits are being performed, yet even then this ratio could be too large considering the detail that complaince requirements should be given.

If further analysis of the audit work of state and private auditors reveals that their compliance audits are not effective, then additional increases in staff will be necessary to supplement the financial audit reviews. It may even become necessary for Office of Revenue Sharing auditors to conduct compliance audits on a sampling or even comprehensive basis. However, any decision in this regard should await further testing of the present procedures for compliance audit.

Until additional staff are authorized and hired, the extra demands on audit staff can perhaps be met by contracting with private firms. A recent report indicates that a nationally recognized CPA firm is currently reviewing 800 audits, and may have its contract extended (Altman, p. 8). This may be a satisfactory solution to insure that at least the initial screening of all audit reports is completed properly.

BIBLIOGRAPHY

Altman, Roger C.; letter to Allen R. Voss, Director, GAO, March 6, 1980.

Fountain, James R., Jr.; "General Revenue Sharing." Testimony before the Senate Subcommittee on Intergovernmental Relations, Committee on Government Affairs, March 25, 1980.

Funkhouser, Glenn E.; "Experiences with the Revenue Sharing Audit Requirements." Governmental Finance, Vol. 8, No. 2 (September 1979).

Gary, T. Jack, Jr.; "A Single Audit of Federally Assisted Programs?"
Public Administration Review, No. 4 (July/August 1979).

Marlin, John Tepper; "Ensuring Accountability for Federal Revenue Sharing
Funds."
Testimony before the Subcommittee on Intergovernmental Relations,
Committee on Government Affairs, U. S. Senate, March 25, 1980.

"Audit Law? Ho, Ho, Ho! Draft, February 14,

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1980.

; "Spending Blind: Non-Compliance with the Revenue Sharing Audit Requirements." Government Accounting and Auditing Series, New York, New York: Council on Municipal Performance, July 30, 1979.

Peterson, Kent A.; "Statement Before the Subcommittee on Intergovernmental Relations of the Senate Committee on Governmental Affairs, March 23, 1980.

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Staats, Elmer B.; Statement Before the Subcommittee on Intergovernmental Relations, Committee on Governmental Affairs, U.S. Senate, on Reauthorizing the Revenue Sharing Program, March 20, 1980.

U.S. Department of the Treasury, Office of Revenue Sharing. Audit Guide and Standards for Revenue Sharing and Antirecession Fiscal Assistance Recipients, Washington, D. C., 1977.

; "Fiscal Accounting Procedures of the General Revenue Sharing Program" in Fact Sheet, July 1978.

; "General Revenue Sharing Audit and Accounting

Requirements" in Fact Sheet, July 1978.

U.S. General Accounting Office, Revenue Sharing Act Audit Requirements Are Improving Audits of State and Local Governments, Washington, D.C., undated.

; Guidelines for Financial and Compliance Audits

of Federally Assisted Programs, Washington, D. C., February 1980.

U.S. Congress, Senate, Subcommittee on Intergovernmental Relations of the Committee on Governmental Affairs, "General Revenue Sharing--The Issues Before Us." 96th Congress, 1st session, Washington, D. C., Government Printing Office, 1979.

U.S. Congress, House, Committee on Government Operations, "Failure to Provide Effective Audits of Federal Grants," 96th Congress, 1st session, House Report No. 96-580, Washington, D. C., Government Printing Office, 1979.

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