B-200951.OM, MAY 11, 1981

B-200951.OM, MAY 11, 1981

AUDIT OF NATIONAL CONSUMER COOPERATIVE BANK (B-200951-O.M.)

DIRECTOR, CED:

OUR MEMORANDUM TO MR. JOHN LANDICHO, B-200951-O.M., DECEMBER 24, 1980, ADDRESSED GAO'S AUDIT RESPONSIBILITIES WITH RESPECT TO THE NATIONAL CONSUMER COOPERATIVE BANK. MR. KEITH FULTZ, OF YOUR STAFF, HAS REQUESTED CLARIFICATION OF OUR MEMORANDUM IN LIGHT OF STATEMENTS MADE TO HIM BY CONGRESSIONAL STAFF MEMBERS AS TO THEIR UNDERSTANDING OF THE SCOPE OF GAO AUDITS OF THE BANK. SPECIFICALLY, THE CONGRESSIONAL STAFFERS EXPRESS THE VIEW THAT GAO COULD FULLY DISCHARGE ITS STATUTORY RESPONSIBILITIES BY PERFORMING ANNUAL FINANCIAL AUDITS OF THE BANK.

AS EXPLAINED IN OUR DECEMBER 24 MEMORANDUM AND FURTHER DISCUSSED BELOW, GAO HAS BROAD DISCRETION OVER HOW TO DISCHARGE ITS OBLIGATION TO EXAMINE ANNUALLY THE "OPERATIONS" OF THE BANK. WE BELIEVE THAT A DETERMINATION TO CONDUCT ONLY ANNUAL FINANCIAL AUDITS WOULD CONSTITUTE A LEGALLY PERMISSIBLE EXERCISE OF SUCH DISCRETION. HOWEVER, IT IS CLEAR THAT GAO IS NOT LIMITED TO PERFORMING FINANCIAL AUDITS. AS DISCUSSED IN THE DECEMBER 24 MEMORANDUM, THE CONFERENCE REPORT IMPLIES THAT GAO WAS EXPECTED TO CONDUCT MORE COMPREHENSIVE AUDITS.

SECTION 115 OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT, PUB.L. 95-351 (AUGUST 20, 1978), 92 STAT. 499, 511, 12 U.S.C. SEC. 3025, PROVIDES THAT UNTIL THE STOCK OF THE BANK HELD BY THE UNITED STATES IS FULLY RETIRED, "THE OPERATIONS OF THE BANK SHALL BE EXAMINED ANNUALLY UNDER THE DIRECTION OF AN AGENCY OR INSTRUMENTALITY OF THE GOVERNMENT DESIGNATED BY THE PRESIDENT, INCLUDING THE GENERAL ACCOUNTING OFFICE, AND REPORTS OF SUCH EXAMINATION SHALL BE FORWARDED TO THE CONGRESS. ***" THE PRESIDENT DESIGNATED GAO TO PERFORM THIS ANNUAL EXAMINATION.

IN ADDITION, THE BANK WAS CREATED AS "A MIXED OWNERSHIP GOVERNMENT CORPORATION," AND IN THIS CAPACITY IS SUBJECT TO THE GOVERNMENT CORPORATION CONTROL ACT. SEE SECS. 101 AND 301 OF PUB.L. NO. 95-351, 92 STAT. 499, 513. THE GOVERNMENT CORPORATION CONTROL ACT REQUIRES GAO TO AUDIT AT LEAST ONCE EVERY 3 YEARS THE FINANCIAL TRANSACTIONS OF MIXED OWNERSHIP GOVERNMENT CORPORATIONS FOR ANY PERIOD DURING WHICH THEY HOLD INVESTMENTS OF GOVERNMENT CAPITAL. SEE 31 U.S.C. SECS. 857 858.

THE LEGISLATIVE HISTORY OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT CONTAINS LITTLE DISCUSSION OF THE NATURE AND SCOPE OF THE AUDITS REQUIRED BY SECTION 115. FN1 OUR DECEMBER 24 MEMORANDUM THUS CONCLUDED THAT SECTION 115 GIVES GAO DISCRETION TO PERFORM THE TYPE OF AUDIT DEEMED APPROPRIATE. WE WENT ON TO NOTE THAT THE AUDIT COULD INCLUDE ANY OR ALL OF A NUMBER OF ITEMS MENTIONED BY MR. LANDICHO, AND THAT THE SCOPE COULD CHANGE FROM YEAR TO YEAR. OUR MEMORANDUM ALSO POINTED OUT THAT THE GAO AUDIT UNDER SECTION 115 WOULD NOT PREEMPT THE FINANCIAL AUDIT REQUIRED TO BE CONDUCTED BY GAO ONCE EVERY 3 YEARS UNDER THE GOVERNMENT CORPORATION CONTROL ACT. HOWEVER, WE NOTED THAT THERE WAS NO LEGAL REASON WHY THE LATTER AUDIT REQUIREMENT COULD NOT BE INTEGRATED WITH OUR SECTION 115 AUDITS.

THE BASIC ISSUE THAT ARISES FROM MR. FULTZ'S DISCUSSIONS WITH THE CONGRESSIONAL STAFFERS IS WHETHER GAO CAN SATISFY SECTION 115 BY CONDUCTING ANNUAL FINANCIAL AUDITS OF THE BANK, AS THEY SUGGEST. THE STAFFERS ACKNOWLEDGED THAT THEIR INTERPRETATION WOULD MAKE REDUNDANT APPLICATION TO THE BANK OF THE PROVISION IN THE GOVERNMENT CORPORATION CONTROL ACT REQUIRING GAO FINANCIAL AUDITS ONCE EVERY 3 YEARS, BUT SUGGESTED THAT THIS REDUNDANCY WAS DELIBERATE.

OBVIOUSLY STATEMENTS OF INTENT BY THE CONGRESSIONAL STAFFERS ARE NOT PART OF THE LEGISLATIVE HISTORY OF PUB.L. NO. 95-351, AND CANNOT BE RELIED UPON IN REACHING A LEGAL DETERMINATION AS TO GAO'S RESPONSIBILITIES UNDER THE LAW. HOWEVER, WE DO NOT BELIEVE THAT GAO IS PRECLUDED AS A MATTER OF LAW FROM CONDUCTING ONLY ANNUAL FINANCIAL AUDITS OF THE BANK.

AS NOTED PREVIOUSLY, SECTION 115 OF PUB.L. NO. 95-351 MERELY PROVIDES THAT "THE OPERATIONS OF THE BANK SHALL BE EXAMINED ANNUALLY UNDER THE DIRECTION OF AN AGENCY OR AN INSTRUMENTALITY OF THE FEDERAL GOVERNMENT DESIGNATED BY THE PRESIDENT ***." THIS LANGUAGE PLACES NO LIMIT UPON THE SCOPE OF THE ANNUAL AUDIT, AND WOULD NOT IN ITSELF PREVENT THE DESIGNATED FEDERAL AGENCY FROM PERFORMING ANNUAL FINANCIAL AUDITS. THE ONLY DIFFICULTY IN APPLYING THE STATUTE IS THE "REDUNDANCY" WHICH ARISES FROM THE FACT THAT THE BANK'S DESIGNATION AS A MIXED-OWNERSHIP GOVERNMENT CORPORATION TRIGGERS AN ADDITIONAL REQUIREMENT FOR A GAO FINANCIAL AUDIT AT LEAST ONCE EVERY 3 YEARS.

WHILE THERE IS AN ELEMENT OF REDUNDANCY HERE, WE DO NOT REGARD IT AS CREATING AN IRRECONCILABLE CONFLICT WHICH WOULD NECESSARILY LIMIT THE APPLICATION OF THE PLAIN TERMS OF SECTION 115. FOR EXAMPLE, THE LANGUAGE OF SECTION 115 SUGGESTS THAT THIS SECTION IS CONCERNED AT LEAST PRIMARILY WITH ASSURING SOME DEGREE OF FEDERAL AUDIT SCRUTINY EACH YEAR. ANNUAL FINANCIAL AUDITS BY GAO WOULD PROVIDE THIS ASSURANCE, AND WOULD NOT RAISE AN ISSUE OF REDUNDANCY WITH THE CORPORATION CONTROL ACT AUDIT FOR 2 YEARS OUT OF 3. IT DOES NOT SEEM UNTENABLE TO CONCLUDE THAT CONGRESS WAS WILLING TO LET THE SECTION 115 AND GOVERNMENT CORPORATION CONTROL ACT AUDITS BE THE SAME FOR THE THIRD YEAR. IN ANY EVENT, SECTION 115 DID NOT REQUIRE THE PRESIDENT TO DESIGNATE GAO TO PERFORM THE FEDERAL AGENCY AUDIT. THUS IT IS CONCEIVABLE THAT ANOTHER AGENCY MIGHT PERFORM ANNUAL FINANCIAL AUDITS UNDER SECTION 115, WHILE GAO PERFORMED A SIMILAR AUDIT ONCE EVERY 3 YEARS UNDER THE GOVERNMENT CORPORATION CONTROL ACT.

IN SUM, WE BELIEVE THAT GAO MAY PROPERLY LIMIT ITS AUDIT ACTIVITIES CONCERNING THE BANK TO ANNUAL FINANCIAL AUDITS. THIS IS CONSISTENT WITH THE LANGUAGE OF SECTION 115 AND, IN OUR VIEW, IS NOT PRECLUDED BY THE OPERATION OF THE CORPORATION CONTROL ACT WITH RESPECT TO THE BANK. NEVERTHELESS, THE PERMISSIBLE SCOPE OF GAO'S AUDIT AUTHORITY IS MUCH BROADER AND EXTENDS TO FULL PROGRAM AUDITS.

FN1 IN ESSENCE, THE HOUSE AND SENATE COMMITTEE REPORTS ON THE LEGISLATION MERELY PARAPHRASE SECTION 115 IN DESCRIBING THE REQUIRED AUDITS. SEE H.R. REP. NO. 95-311 AT 23 (1977) AND S.REP. NO. 95-795 AT 35 (1978). THE CONFERENCE REPORT ALSO CONTAINS PRIMARILY DESCRIPTIVE REFERENCES ALTHOUGH, AS POINTED OUT IN OUR PRIOR MEMORANDUM, IT SUGGESTS THAT THE BROAD AUDITS TO BE CONDUCTED BY THE OFFICE OF SUPERVISION AND AUDIT WOULD CONSTITUTE A CONTINUATION OF THE EARLIER FEDERAL AUDIT. SEE H.R. REP. NO. 95-1399 AT 22 (1978). THE ONLY OTHER DISCUSSION OF THE AUDIT REQUIREMENTS THAT WE FOUND IS THE FOLLOWING RATHER CRYPTIC STATEMENT BY REPRESENTATIVE ST. GERMAIN, FLOOR MANAGER OF THE BILL, DURING HOUSE CONSIDERATION OF THE SENATE AMENDMENTS:

"IN ESSENCE BOTH THE HOUSE AND SENATE BILLS DO CALL FOR AN AUDIT. AS TO THE GOVERNMENT AGENCY WHICH WOULD PERFORM THE AUDIT OR THE PRIVATE AGENCY WHICH WOULD PERFORM THE AUDIT, THAT WOULD BE CHOSEN BY THE PRESIDENT. THE ONLY DIFFERENCE IS THAT THE SENATE BILL EXPANDS THE POSSIBILITY OF AUDIT AGENCIES TO INCLUDE THE GENERAL ACCOUNTING OFFICE, SO IF INDEED WE WENT TO CONFERENCE WE WOULD BE IN A POSITION OF ACCEPTING THE GENERAL ACCOUNTING OFFICE OR NOT, BUT WE COULD NOT SUBSTITUTE THE GOVERNMENT CORPORATION CONTROL ACT PROVISION. BUT, THE PROVISIONS FOR FULL AUDITS AND OVERSIGHT ARE CLEAR AND PROVIDE ALL THE NECESSARY CONTROLS PROTECTIONS." CONG. REC. FOR JULY 24, 1978 (DAILY ED.), AT H7178.