into operation promptly, or if it has been adversely modified, we advise the agency of the needed corrective action. If the recommended action is not taken, approval of the design is withdrawn.

In fiscal year 1972, we issued nine reports on specific aspects of Department of Defense accounting systems-three to the Congress and six to the Secretary of Defense and Secretaries of the military departments. We also issued seven reports to agency officials on selected aspects of civil agency accounting systems. Examples of subjects on which we made recommendations in reports are (1) simplifying accounting procedures to save personnel costs and computer processing time, (2) improving the usefulness of management reports by providing comparisons of costs and associated revenues for manageable segments of operations, (3) making adequate studies before effecting. major accounting systems changes, (4) improving pay systems, (5) maintaining supply inventory records, and (6) improving financial statements and fund controls.

Review and Settlement of Accountable Officers' Accounts

The Budget and Accounting Procedures Act of 1950 (31 U.S.C. 67 (a)) provides, in part, that:

except as otherwise specifically provided by law, the financial transactions of each *** agency, including but not limited to the accounts of accountable officers, shall be audited by the General Accounting Office in accordance with such principles and procedures and under such rules and regulations as may be prescribed by the Comptroller General of the United States.

During fiscal year 1972, 46 reports were issued on reviews of accounts of accountable officers in the civil departments and agencies. These reports, directed to agency officials, are listed in Section III of the Appendix. They contain the results of our reviews of the financial management systems, including tests of receipt and expenditure transactions, and recommendations for improvement.

Examples of matters reported are (1) weaknesses in controls over cash collection, (2) failure to show substantial sums deposited in savings and loan associations on financial statements, (3) failure to reconcile results of physical inventories with property records, (4) failure to adequately review the validity of obligations recorded at the end of the fiscal year, (5) failure to recoup travel advances not needed by employees, (6)

inadequate control over accounts receivable and inadequate collection action, (7) inadequate control over time and attendance reporting and payroll check distribution, (8) failure to properly mark paid invoices to prevent duplicate payments, and (9) inadequate internal audit of receipt and expenditure transactions.

Administration of Civilian Pay and

Allowances in the Department of Defense

Our review of these activities includes an evaluation of the systems and procedures used, the effectiveness of internal controls and internal audit work, and tests of payroll transactions. During 1972 we emphasized reviewing payroll payments applicable to within-grade increases, premium pay, and severance pay.

During 1972, 59 reports were issued on reviews of the administration of civilian pay and allowances at military installations in the United States; 10 reports were issued pertaining to overseas installations. A list of these reports, directed to agency officials in each of the military departments, is included in Section III of the Appendix.

Examples of matters reported are (1) need to strengthen internal controls in computerized payroll operations, (2) lack of compliance with administrative regulations governing payments to employees under the Coordinated Federal Wage System, (3) deficiencies in the maintenance of individual retirement records, (4) deficiencies in determinations, computations, and control of severance pay entitlements, (5) lack of adequate review and control of pay change actions by personnel offices, (6) inadequate control over pay documents within the payroll office, (7) opportunities for decreasing payroll processing costs by consolidating payrolls, and (8) lack of required documentation to support employees' entitlement to annual premium compensation.

In July 1971 we sent a special report to the Secretary of Defense on our review of severance payments to separated employees made by selected military installations. The review was made because we anticipated that a large number of severance payments would be made to employees separated because of base closures and reductions in force announced by the Secretary in October 1969 and March 1970. We concluded that independent verification of the correctness of determinations and computations of entitlements needed to be strengthened and that action was needed to insure that severance payments would be promptly dis

continued when employees were reemployed. We made specific recommendations to correct the procedural deficiencies noted. The Secretary advised us in September 1971 that the military departments had initiated actions in line with our recommendations.

In December 1971 we sent to the Chairman, Civil Service Commission, a special report on our review of the implementation of the Coordinated Federal Wage System. The Commission developed the System pursuant to the President's directive to provide a common Federal wage system for employees in trade, craft, and laboring occupations. We concluded that the System had been promptly implemented and that pertinent practices had been coordinated. We found, however, that the Commission's procedures for conducting wage surveys and establishing wage schedules needed to be strengthened. We made specific recommendations to the Chairman on how this could be done. The Civil Service Commission is now considering these recommendations in the light of pertinent, pending legislation.

Special Report on Accounting Systems' Development Problems and Progress

In May 1972 we issued our third report to the Congress summarizing our findings on progress and problems relating to improvements of Federal agency accounting systems during calendar years 1970 and 1971. The House Committee on Government Operations, in its report dated March 5, 1968 (H. Rept. 1159, 90th Cong., 2d sess.), had recommended that such a report be made.

Joint Financial Management
Improvement Program

The Joint Financial Management Improvement Program (JFMIP) is a Government-wide cooperative effort of all Federal agencies to establish and maintain systems of financial management of maximum usefulness throughout the Federal Government. Leadership is provided by the four principals of the program-the Comptroller General of the United States, the Secretary of the Treasury, the Director of the Office of Management and Budget, and the Chairman of the Civil Service Commission.

The principals furnish broad policy guidance to the program's Steering Committee and receive overall reports of progress. The Steering Committee, made up

of a representative of each of the central financial agencies, coordinates the program. The Committee meets regularly to consider problem areas, direct work projects, and evaluate financial management progress throughout the Government.

In meetings during the year, the Steering Committee and top financial management officials of the Federal Aviation Administration; the U.S. Coast Guard; the Department of Health, Education, and Welfare; the Veterans Administration; the General Services Administration; and the Environmental Protection Agency reviewed financial management systems development progress and emphasized the need for managing program performance and costs and for designing accounting systems to meet management needs.

The Steering Committee continued to publish the JFMIP News Bulletin quarterly. The Bulletin highlighted JFMIP activities and included progress reports on Government-wide financial management improvement activities.

A second State-Federal Financial Management Conference was held in February 1972 in Washington, D.C., to follow up on the favorable response to the initial conference in October 1971. It was sponsored by the Council of State Governments; the National Association of State Governments; the National Association of State Auditors, Comptrollers, and Treasurers; the Fiscal Review and Post-Audit Workshops of the National Legislative Conference; and JFMIP. The conference was attended by State financial executives and the top financial management staffs of Federal agencies that are active in grant-in-aid programs. It centered around the theme "Simplification and Coordination of Federally Assisted Programs."

A JFMIP-supported bill signed into law by the President (Public Law 92-310, approved June 6, 1972) repeals all statutory requirements for bonding Federal civilian employees and military personnel who are charged with accountability for public funds or public property and permits the Government to become a self-insurer for fidelity losses. The act provides that, when losses prove to be uncollectible, agencies may, under regulations to be issued by the Comptroller General, charge their operating appropriations. This act will save the Government money and is in accord with the general policy of self-insurance that the Government has established for most of its activities.

More detailed information about the accomplishments and activities under the Joint Financial Management Improvement Program appears in separately published annual progress reports on the program.

General Management

Automatic Data Processing

The tremendous impact of automatic data processing (ADP) on governmental operations over the past decade and the potential benefits from ADP, particularly cost savings and improved efficiency, are well known. On the other hand, many myths persist as to the real benefits of ADP systems, and rapid technological changes demand a continual updating of knowledge if the truth is to be sorted out from the myths. Unless expert policy guidance on ADP is available to governmental managers, there is danger that important decisions by the Federal Government in helping to keep computer technology healthy, competitive, and productive may not be made or that poor decisions will be made.

For more than a decade, we have been studying and reporting on policy matters arising from the continually expanding impact of ADP systems on Government operations. We are continuing to expand and strengthen our capabilities in this highly technical area to enable us to better serve the Congress, assist other Federal agencies, and provide technical assistance in the audit of Federal programs and operations.

Government-wide Reviews

Past GAO reports on ADP matters have critically evaluated a wide variety of Government-wide ADP policy issues, including:

Trend of changes in developments of ADP equipment and software.

Financial policies.

Maintenance and peripheral equipment issues.
Acquisition and utilization policies.

Studies are underway on a number of ADP stateof-the-art issues which-although not new areas of concern-have not previously received proper attention in the context of Government-wide policy positions. Probably the single most challenging task undertaken is an attempt to develop for the Congress and managers throughout the Government a comprehensive set of policies and standards for use in evaluating the productivity and efficiency of ADP operations. Other studies concern:

The need for better ADP documentation. The need for improved security measures over ADP systems.

The merger of telecommunication networks with computer systems.

The trend of development of micromation and automatic entry procedures.

The standardization of data codes, files, banks, and systems.

Direct Assistance to the Congress

GAO efforts on behalf of the Congress relating to the development, establishment, and maintenance of a standardized information and data processing system in the Federal Government-a requirement of the Legislative Reorganization Act of 1970-are described in Chapter Two (p. 11).

Principles and Procedures for Information Systems

We have started a long-term project to (1) develop generally accepted principles and procedures for planning, developing, and operating information systems and (2) create a body of knowledge supporting these principles and procedures. At the request of the Comptroller General, the National Academy of Sciences has directed its Computer Science and Engineering Board to assist in this long-term effort.

The project is being undertaken in stages. The first stage, the development of a plan, is being done by a special planning group made up of Board members. specialists, and others to insure the necessary range and depth of expertise. Development of the plan was completed in October 1972. Follow-on activities wil! depend on the outcome of this planning effort.

The Board believes that the effective operation and use of computer systems is a nationally important problem and that the outcome of GAO's long-term program will contribute directly to the improved utilization of computer systems throughout the Government and the Nation at large.

Research and Development

We conduct studies and develop advanced computer auditing techniques to keep pace with advances in computer technology and increasing sophistication in computer-based systems. We also maintain a body of knowledge on the current state of the art in ADP.

The primary objective of our research and development efforts in this area is to improve the capability of our audit staffs in evaluating agencies' effectiveness in their management of ADP systems. As agencies continue to extend the state of the art in designing their

systems, we recognize the need to develop appropriate methods for auditing these systems and effective audit techniques and tools.

Systems Analysis

Our Office began developing a systems analysis capability about 5 years ago. Since then we have steadily increased the size of this specialized group in the Financial and General Management Studies Division to 23 professional employees by hiring carefully selected specialists from outside our Office and by training selected experienced GAO auditors in various university graduate schools. This group provides a central capability in accordance with section 204 of the Legislative Reorganization Act of 1970 which requires us to have available employees who are expert in analyzing and conducting cost-benefit studies of Government programs. Similarly trained employees are also located in

other GAO divisions where their work pertains to the particular review objectives of the divisions to which they are assigned.

The central group performs special studies on its own initiative, assists in ongoing audit reviews being conducted for other units, makes reviews at the request of Members of Congress and of congressional committees, and provides instructors and materials for training auditors in the uses of systems analysis. Special Studies

During the year two congressional reports were issued on the results of special studies:

A report on "Alternatives to Secondary Sewage Treatment Offer Greater Improvements in Missouri River Water Quality" recommended that the timing of the requirement for secondary treatment of sewage be reconsidered in the light of the conditions.

existing along the river and the nature of the sources of pollution. (See Appendix, Section I, Item 85a.) We also submitted a report to the Joint Economic Committee on "Feasibility of Constructing Price Indexes for Weapons Systems." This report concluded that available price indexes were unsuitable because they were based on purchases of items other than military items or because they did not include a sufficient cross section of military items. We believe that appropriate price indexes could best be constructed by the Department of Defense and the Bureau of Labor Statistics and that this could best be done by:

Requiring contractors and major subcontractors to submit to the Department of Defense the data necessary to construct labor and material price indexes.

Directing the Department to construct price indexes and report the results to the Congress.

Making the Bureau of Labor Statistics responsible for regularly preparing marketwide price indexes for different types of weapons systems. (See Appendix, Section I, Item 160a.)

We responded to a request for analysis of studies sponsored by the National Aeronautics and Space Administration (NASA) on which the cost estimates and economic justification of the proposed space shuttle program are based. The assistance furnished required the capability to assess, test, operate, and modify the computerized cost estimating and economic models which were developed for NASA by Mathematica, Incorporated.

Case Studies

Some of our reports have demonstrated the usefulness of systems analysis but they have not fully explained the application of the systems analysis approach or techniques. For this reason, a new series of technical case study reports was started during the year to provide a means of more fully communicating these applications to auditors in GAO, Federal agencies, and State and local governments and to other readers interested in these applications. Two such studies were issued during the year.

Audit Standards

During the year, work was completed in preparing a statement of standards for auditing governmental

organizations, programs, activities, and functions. This project was begun in 1970 under GAO leadership and was carried out by representatives from major Federal agencies involved in grant-in-aid programs. Assistance was also obtained from representatives of State, county, and city governments and from leading professional organizations including the American Institute of Certified Public Accountants, the Institute of Internal Auditors, the Federal Government Accountants Association, the Municipal Finance Officers Association, and the American Accounting Association.

The statement of auditing standards (in booklet form) was officially released on August 1, 1972, by the Comptroller General. In releasing the statement, he stated:

In my opinion, these new, expanded auditing standards are a very important landmark in the auditing field. They provide for a scope of auditing of government programs and activities that, properly applied, should result in much better information for managers, legislators, and the public on how public funds are administered and expended and whether results intended are being achieved.

We are hopeful that these standards will foster broader and more responsive auditing at all levels of government, and that they will be a real force for improvement in those State and local governments that still are performing financial audits of limited scope and are not responding to the needs of users for more and better information on public programs. I believe this aspect is of special importance at this time of growing concern with accountability for how public funds are managed and the consideration being given to sharing Federal revenues with State and local governments.

The standards are intended to apply to audits at all levels of government irrespective of who performs them.

The issuance of this statement is but a beginning step in the long process of strengthening the audit of governmental programs and activities at all levels of government-an important need in view of the rapidly growing amount of Federal financial assistance being provided to State and local governments.

Other work in process or planned in this long-range effort includes:

Performing demonstration audits in cooperation with State auditors. Developing machinery.

workable audit

coordinating

Devising suitable and effective training programs. Drafting model audit laws for State and local governments.