More Stringent Revenue Sharing Act Requirements Are Upgrading State and Local Governments' Audits

GGD-80-35: Published: May 16, 1980. Publicly Released: May 16, 1980.

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With the passage of the Revenue Sharing Act, Congress adopted a new approach to giving general financial assistance to State and local governments. For the first 5-year period, ending on December 31, 1976, the Act authorized distribution of $30.2 billion to State and local governments. State and local governments welcomed revenue sharing funds because fewer administrative requirements and controls applied to them than to other forms of Federal domestic aid. However, the 1976 amendments to the Act set more stringent audit requirements for about 11,000 State and local governments. The amendments required that beginning January 1, 1977, all revenue sharing recipients receiving $25,000 or more in annual entitlement payments have independent audits of their entire financial operations. These audits should be conducted in accordance with generally accepted auditing standards at least once every 3 years, and reviewed by the Office of Revenue Sharing (ORS).

Since few recipients have submitted acceptable audits, GAO was unable to determine the extent of compliance with the audit requirements or to evaluate ORS enforcement procedures. But the amended act and quality control efforts of ORS are benefiting state and local governments by requiring state audit agencies and public accounting firms to upgrade their audit standards. A review of ORS records showed that 14 audit agencies in 12 States and 81 of the 188 public accounting firms deviated from generally accepted auditing standards required by the act. In addition, six state audit agencies were not considered independent. The review also showed that corrective action had been taken to correct major weaknesses in the audit control system of ORS. One correction was the establishment of a time limitation for submitting audit reports. Failure to meet the time limitation, would result in the temporary withholding of the recipient's entitlement payment. Therefore, due to the time required to revamp their audit operations, some state agencies with substandard audit practices will not be able to complete acceptable audits in a timely manner.

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