	Evolution of the Single Audit Act and Its Underlying Principles

In the early 1980s, Congress had concerns about a lack of adequate  oversight and accountability for federal assistance provided to state and  local governments. In response to concerns that large amounts of federal financial assistance  were not subject to audit and that agencies sometimes overlapped on  oversight activities, Congress passed the Single Audit Act of 1984. The Single Audit Act adopted the single audit concept to help meet the  needs of federal agencies for grantee oversight as well as grantees’ needs  for single, uniformly structured audits. Federal grant awards to state and local governments have increased  significantly since the Single Audit Act was passed in 1984. As shown in figure 1, the federal  government’s use of grants to state and local governments has risen  substantially, from $7 billion in 1960 to almost $450 billion budgeted in  2007. GAO supported the passage of the Single Audit Act, and we continue to  support the single audit concept and principles behind the act as a key  accountability mechanism over federal grant awards. However, the quality  of single audits conducted under this legislation has been a longstanding  area of concern since the passage of the Single Audit Act in 1984. The federal Inspectors General as well have found  similar problems with single audit quality. As shown in table 2, the PCIE study estimated that, overall, approximately  49 percent of the universe of single audits fell into the acceptable group. Specifically, 63.5 percent of the audits of entities in stratum 1 (those  expending $50 million or more in federals awards) were deemed  acceptable, while 48.2 percent of audits in stratum 2 (those expending at  least $500,000 but less than $50 million) were deemed acceptable. We  are concerned that audits are not being conducted in accordance with  professional standards and requirements. These audits may provide a false  sense of assurance and could mislead users of audit reports regarding  issues of compliance and internal control over federal programs. PCIE Recommendations to Improve Single Audit Quality Are Based on Three-Pronged Approach

The PCIE report recommended a three-pronged approach to reduce the  types of deficiencies noted and improve the quality of single audits:  1.  revise and improve single audit standards, criteria, and guidance;  2.  establish minimum continuing professional education (CPE) as a  prerequisite for auditors to be eligible to conduct and continue to  perform single audits; and  3.  review and enhance the disciplinary processes to address  unacceptable audits and for not meeting training and CPE  requirements. GAO Analysis of PCIE Recommendations

While we support the recommendations made in the PCIE report, it will be  important to resolve a number of issues regarding the proposed training  requirement. Additional Factors for Consideration When Determining Actions to Improve Audit Quality

In addition to the findings and recommendations of the PCIE report, we  believe there are two other critical factors that need to be considered in  determining actions that should be taken to improving audit quality: (1)  the distribution of unacceptable audits and audits of limited reliability  across the different dollar amounts of federal expenditures by grantee, as  found in the PCIE study; and (2) the distribution of single audits by size in  the universe of single audits. The PCIE report presents compelling evidence that a  serious shortfall in the quality of single audits continues to exist. We believe that there may be opportunities for  considering size characteristics when implementing future actions to  improve the effectiveness and quality of single audits as an accountability  mechanism. In addition to the considerations surrounding the specific  recommendations for improving audit quality, a separate effort taking into  account the overall framework for single audits may be warranted. Is the current federal oversight structure for single audits adequate and  consistent across federal agencies? What role can the auditing profession play in increasing single audit  quality? A-133 and the Single  Audit Act need updating?
Why GAO Did This Study

Federal government grants to state and local governments have risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. The single audit is an important mechanism of accountability for the use of federal grants by nonprofit organizations as well as state and local governments. However, the quality of single audits conducted under the Single Audit Act, as amended, has been a longstanding area of concern since the passage of the act in 1984. The President's Council on Integrity and Efficiency (PCIE) recently issued its Report on National Single Audit Sampling Project, which raises concerns about the quality of single audits and makes recommendations aimed at improving the effectiveness and efficiency of those audits. This testimony provides (1) GAO's perspective on the history and importance of the Single Audit Act and the principles behind the act, (2) a preliminary analysis of the recommendations made by the PCIE for improving audit quality, and (3) additional considerations for improving the quality of single audits.

What GAO Found

In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees' needs for single, uniformly structured audits. GAO supported the passage of the Single Audit Act, and continues to support the single audit concept and principles behind the act as a key accountability mechanism for federal grant awards. However, the quality of single audits has been a longstanding area of concern since the passage of the act in 1984. In its June 2007 Report on National Single Audit Sampling Project, the PCIE found that, overall, approximately 49 percent of single audits fell into the acceptable group, with the remaining 51 percent having deficiencies severe enough to classify the audits as limited in reliability or unacceptable. PCIE found a significant difference in results by audit size. Specifically, 63.5 percent of the large audits (with $50 million or more in federal award expenditures) were deemed acceptable compared with only 48.2 percent of the smaller audits (with at least $500,000 but less than $50 million in federal award expenditures). The PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. GAO is concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of the single audit reports. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies found and to improve the quality of single audits: (1) revise and improve single audit standards, criteria, and guidance; (2) establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to be able to conduct and continue to perform single audits; and (3) review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. In this testimony, GAO supports PCIE's recommendations and points out issues that need to be resolved regarding the proposed training and other factors that merit consideration when determining actions to improve audit quality. GAO believes that there may be opportunities for considering size when implementing future actions to improve the effectiveness and quality of single audits. In addition, a separate effort considering the overall framework for single audits could answer such questions as whether simplified alternatives can achieve cost-effective accountability in the smallest audits; whether current federal oversight processes for single audits are adequate; and what role the auditing profession can play in increasing single audit quality.