Program: 1. Increase in audit workload resulting from existing pro- 148, 605 2. Increase in audit workload resulting from new or ex- 363, 490 3. Services of other agencies-Defense Contract Audit 132, 000 Audits of construction project costs must be given audit priority, as final payment to grantees cannot be made until the audit of final costs has been made upon completion of construction. Fifteen positions and $148,605 are requested to meet the additional construction audit workload created by a six 1,044, 720 -80, 720 +964, 000 new programs enacted by the 88th Congress. Current estimates are that these new programs will increase our workload by audits of 821 such projects in fiscal year 1967. 2. New or expanded programs Thirty-six positions are required to initiate, develop work programs, and perform audits of State agencies, institutions of higher education, nonprofit organizations, and other entities receiving Federal funds under the provisions of three major new programs enacted by the 89th Congress. (a) Appalachian regional development: Audits of approximately 25 grants for (c) Social Security Amendments of 1965: 16 positions are requested to perform (d) Higher Education Act: Audits will be made of grants to 55 State agencies and approximately College work study: 3 additional positions are requested to provide for Total... 3. Services of other agencies-Defense Contract Audit Agency A continuation of the agreement with the Defense Contract Audit Agency is requested, in the extension of their present audit to include the audit of HEW contracts at locations where they presently perform audits. Finding of this item was formerly included in the budget of the National Institutes of Health. Explanation of transfers During July 1965, the Department reorganized its audit efforts so as to keep this vital activity in pace with the needs of the many and complex programs charged to its administration. This reorganization resulted in establishment of the Office of Audit in the Office of the Secretary. The Office of Audit is responsible for conducting comprehensive internal audits for all Department activities except headquarters activities of the Public Health Service and the Social Security Administration which have an established internal audit program, and for all external audits of Department operations administered by and through its various grantees and contractors. The Office of Audit is comprised of a staff of auditors and supporting administrative personnel under the supervision of a Director who is responsible to the Comptroller. Organizationally, the Office consists of a headquarters staff loIcated in Washington and nine regional audit offices located in and having the same geographical boundaries as the Department's nine regional offices. The chart on page 54 reflects the responsibilities of each of the several segments of the Office of Audit. 60-302-66-pt. 2- -9 Prior to establishment of the Office of Audit, the Department's audit activities were conducted by a number of audit organizations located at both the department and agency levels. Separate audit staffs were maintained for audits of grants to States, grants to universities and other nonprofit organizations, contract audits, and internal audits of agency operations. This fragmentation of audit responsibility contributed to a lack of uniform direction, outmoded audit concepts, and a sizable audit backlog. Reorganization of the Department's audit efforts established one central audit organization with responsibility for determining audit programs, including scope, depth, and frequency, which are necessary to provide adequate protection to operating agencies and Department officials and the public interest. From an operational standpoint, it brings together in one common staff greater resources in terms of special skill and manpower which permits greater flexibility in meeting peak workloads and providing a timely and responsive staff service. This, in turn, lessens the impact on grantees and contractors by having one audit group review all Department programs while at the same time conserves substantial time and travel costs. I. Accomplishments of audit services—fiscal year 1965 and 1966 A. Fiscal year 1965 In fiscal year 1965, the various audit agencies, consolidated into the present Office of Audit, completed 3,370 audits covering the programs of the Department (see schedule on page 41-D). These audits resulted in sustained audit exceptions totaling $2,766,880. There are other audit findings currently under consideration which may require additional information from the grantee before a resolution is finally reached. The following are representative of audit findings reported in fiscal year 1965: 1. Training and demonstration grants.-These audits disclosed a weakness in the documentation to support the grantee's contribution in the grant. This problem arises because the grantee contribution is usually in the form of salaries, overhead, and use of equipment, and requires support to show that the grantee contributed its share in the cost of the project. The HEW program administrators are now in the process of developing instructions to grantees which will strengthen the requirements in this area. 2. State health grants.-The audit of a State health department disclosed a method of recording expenditures applicable to the State's various health programs which the auditor was unable to reconcile to the State's claim for purposes of Federal matching. The State agency and HEW program representatives are presently exploring means for determining an acceptable basis for distribution of expenditures which will be equitable to the State and the Federal Government. B. Fiscal year 1966 (7-month operation) During the first 7 months of fiscal year 1966, the Office of Audit has completed 2,393 audits covering HEW programs which resulted in sustained audit exceptions totaling $2,145,142 (see schedule on page 41-D). In fiscal year 1966, we adopted a new audit approach which provides for analyzing and developing data for timely reporting of causes of potential deficiencies early in the program. When deficiencies are noted, recommendations are made which would prevent similar deficiencies in future periods. Representative audit findings reported in fiscal year 1966 are: 1. Research grants and contracts.—(a) A large portion of grantee institutions audited were unable to adequately support their claim for salaries and wages of professional personnel, due to the absence of reporting time or effort documents. (b) Many institutions reviewed did not have formalized policies and procedures for the accounting of Federal grants. This resulted in inconsistent and inaccurate reporting of grant costs. (c) A number of grantee institutions claimed the statutory maximum indirect cost rate allowed of 20 percent, rather than making a determination of the actual indirect costs and claiming the lesser amount, as required by law. Revised procedures have been institued by the HEW program representatives and grantees which will correct these deficiencies. 2. Public assistance.-A State welfare agency was allocating administrative costs to Federal welfare programs based upon a formula approved in the State plan. The audit disclosed that the State's interpretation of the formula resulted in an inequitable distribution of costs to the Federal Government. The State and Department representatives are presently negotiating a revised formula which will provide a more equitable distribution of costs to both the State and Federal Government. 3. College work study program.-Audits of institutions participating in this program disclosed the following major types of deficiencies: (a) Application forms prepared by the institution for student employment under this program were inadequate. The forms did not contain provision for obtaining all information necessary to determine eligibility under this program. (b) A number of institutions did not maintain an adequate system for the preparation and control of student time reports which is the basis for payments to the students. (c) Grantee contributions were computed incorrectly or not promptly deposited to the college work study program fund as required. Deficiencies noted during the audit have been discussed with the respective grantees who have agreed to take corrective measures. 4. NDEA student loan program.-The audit of institutions maintaining a student loan program disclosed the following typical problem areas: (a) Insufficient internal control, i.e., (1) in a number of institutions one individual was responsible for all aspects of loan administration including payments, collections, and cancellations, and (2) security over executed and active notes was inadequate. (b) Accounting procedures-student loan funds were commingled with institutional funds, improper allocation of loan repayments between principal and interest, and subsidiary accounts were not reconciled to general ledger accounts. (c) Loan approval-lack of review of loans approved by supervisory personnel, loans approved in excess of legal limit. (d) Loan cancellation and collection-absence of established procedures, errors in computation of loan cancellation for teachers' services. Deficiencies noted during the audit have been discussed with the respective grantee agencies who have agreed to take corrective measures. Summary of reports released and exceptions sustained 2 Information not available in Office of Audit since audits were made by agencies audit staffs prior to reorganization. Detailed records not maintained. 3 There are questioned expenditures under consideration by operating agencies and institutions involved These audit reports were released the latter part of 1965 and the agencies have not had sufficient time to resolve the issues involved. II. Program for fiscal year 1966 During fiscal year 1966, the first year of operation for the Office of Audit, emphasis is being devoted to making this organization one that is fully capable of providing a timely and responsive service to the needs and interest of management: one that will assist them in the discharge of their responsibilities. Related to this effort is the undertaking of such major tasks as: Gathering meaningful workload data; determining realistic audit frequency cycles; the adoption and implementation of modern-day audit techniques; and revising existing audit guides and developing audit guides for newly enacted programs. Also, considerable emphasis is being devoted to training of our audit staff. At the time the Office of Audit was established, it was staffed with about 250 auditors. Of this number, many had received training in audits of but one category, i.e. audits of grants to States. It is contemplated that by the end of fiscal year 1966, we will have approximately 350 auditors. Plans have been developed whereby all auditors will receive training and experience in all Department programs. A. Audit workload: Basically, the Department's audit workload can be divided into the following three general categories: Internal audits of Department and agency operations, external audits of grants to State and local governments, and external audits of grants to universities and other nonprofit organizations. In terms of number, as of July 1, 1965, this represented approximately 545 State agencies, 10,000 local units of government, 4,000 universities and other nonprofit organizations, and 2,300 construction contracts. Involved also is a continuing internal review of the Department's many and diversified activities and operations. At the time of reorganization, an audit backlog existed in the two external audit categories. This sizable audit backlog coupled with the need to gear up to handle audits of the Department's new and expanding programs requires the implementation of bold and imaginative audit techniques which, when fully implemented, will provide a maximum of audit coverage at a minimum of audit effort and, at the same time, include the appropriate audit steps necessary to provide adequate assurance that Government funds are properly expended. The following presents selected examples of recent progress in this area. 1. Audits of universities and nonprofit organizations.--The most critical area in need of increased audit emphasis pertains to audits of grants to universities and nonprofit organizations. Many such organizations have not been audited for several years. Further, past experience indicates that many nonprofit organizations do not have satisfactory business management operations or adequate internal controls. In view of this situation, it has been decided to increase the audit effort devoted to this category of grantees. Even with this increase, however, the vast number of such organizations that receive funds from the Department (about 4,000) prevent our attaining all such audits on a reasonably current basis. For this reason, necessary measures are being taken to expand audit coverage to the fullest extent possible within the capabilities of our audit staff. These include the following: (a) In cooperation with the Department's agencies, we are developing an audit priority system for the scheduling of such audits. This system will take into consideration such criteria as the amount of Federal funds involved, the results of recent functional reviews by program personnel, past audit experience, and other factors which will assure that potential and identified problem areas receive adequate audit coverage. (b) The Department's operating agencies presently make awards to approximately 350 educational and other nonprofit organizations that also operate under Department of Defense (DOD) contracts. In the spirit of efficiency and economy, we are negotiating with the Defense Contract Audit Agency for that Agency to extend its audits at those organizations where it has audit cognizance to include all DHEW grants. Similar arrangements are being explored with other Federal grant awarding agencies. (c) Many of the Department's programs are administered through educational institutions and nonprofit organizations. Thus one organization may receive grants from more than one operating agency. In such cases, we have initiated a "total audit" concept whereby our auditors perform an audit of all such grants at the institution thereby permitting an evaluation of total management operations as they affect Department funds. This approach has proved beneficial to the Department as well as the grantee organization in that it limits the number of visits made and thus lessens audit impact. 2. Audits of State and local governments.-Increased emphasis to audits of grants to universities and nonprofit organizations will result in a reduction of the audit effort previously devoted to audits of State and local governments. However, measures are now being put into effect whereby this decrease in audit effort will be minimized by the implementation of revised audit techniques and concepts. The scope of audits of grants to State and local governments has been broadened to provide for a more comprehensive type review. In these audits, we not only review individual transactions on a test basis, but more importantly |