State Highway Agencies Need To Employ Independent Auditors for Audits of Federal Funds

AFMD-82-5: Published: Oct 30, 1981. Publicly Released: Oct 30, 1981.

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GAO reviewed the Department of Transportation's (DOT) plan for auditing federally funded State highway programs because of concern that this plan could violate the independence standard for Government auditing.

If DOT carries out its plan to allow State highway agencies to engage their own internal auditors as the principal auditors of Federal funds, the auditing standard relating to independence would be compromised. According to the standard, the internal auditors could not be presumed independent since they are organizationally located inside the State agencies. Office of Management and Budget Circular A-102 requires Federal grant recipients to arrange for independent audits of their operations at least every 2 years. Although the Circular does not define independent, it requires that audits be performed in accord with generally accepted Government auditing standards. To help achieve maximum independence, the standard states that the auditors should not be part of the organization under audit. The State highway agencies' own internal auditors cannot be considered independent when they audit their own organizations for the Federal Government. The main objective of internal auditors is to serve the organizations to which they report. This can impair their ability to be objective in citing violations by the agencies they serve. It would be in the best interest of the Government and DOT to arrange for independent audits. The independent audit requirement can be met in several ways, and the costs can be minimized by fully using the internal auditor's work after appropriate tests are made. If the reimbursement issue becomes an obstacle to obtaining independent audits, DOT may want to reexamine the position that audit costs for the Federal-Aid Highway Program are not allowable costs.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Federal Highway Administration to immediately change the draft regulations and inform State highway agencies of this change so that they will engage principal auditors external to their organizations, such as State auditors, State legislative auditors, or certified public accountants. These external auditors should fully test and maximally use the internal auditors' work to reduce costs and avoid duplication.

    Agency Affected: Department of Transportation


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