B-241096 January 30, 1991

B-241096 January 30, 1991

The Environmental Protection Agency may not require a state to provide a separate financial or financial and compliance audit of its water pollution revolving fund in addition to a "single audit" provided under 31 U.S.C. Sec. 7502. Section 606(b) of the Water Quality Act of 1987 (codified at 33 U.S.C. Sec. 1386(b)) mandates that audits of the water pollution revolving funds be conducted in accordance with the Single Audit Act of 1984. 31 U.S.C. Sec. 7501-7507.

Memorandum

Date: January 30, 1991

To: Assistant Director, AFMD - Jerry Skelly

Thru: Assistant General Counsel, OGC/AFMD -Bertram J. Berlin

From: Attorney-Adviser, OGC/AFMD - Mark C. Speight

Subject: EPA Authority to Require Separate State Audits of Water Pollution Revolving Funds (B-241096)

You requested our views on the authority of the Environmental Protection Agency (EPA) to require a state to provide a separate financial and compliance.audit of its water pollution revolving fund established under the Water Quality Act of 1987. We understand that officials of several states, the National State Auditors Association (NSAA), and the EPA . disagree on whether EPA may require a separate audit. For the following reasons, we conclude that EPA may not require such an audit in addition to a "single audit" provided under the Single Audit Act of 1987. 31 U.S.C. Sec. 7501-7507.

BACKGROUND

In January 1988, the EPA issued its "Initial Guidance for State Revolving Funds" to implement the audit requirements in section 606(b) of the Water Quality Act of 1987. 33 U.S.C. Sec. 1386(b). The guidelines provide that "at least once a year the Administrator (through the Office of the Inspector General) will conduct or require the State to have independently conducted, a financial and compliance audit of the SRF (State Revolving Fund) and the operations of the SRF." EPA has requested that several states obtain separate financial and compliance audits of their water pollution revolving funds.

DISCUSSION The Water Quality Act of 1987 Audit Requirements

The Water Quality Act of 1987 authorizes the Administrator of the EPA to require states to provide independently conducted reviews and audits of their water pollution revolving funds. 33 U.S.C. Sec. 1386(b). However, these reviews and audits must be conducted in accordance with the Single Audit Act of 1984, 31 U.S.C. Sec.(s) 7501-7507. Id. Therefore, the issue we must address is whether it would be consistent with the Single Audit Act for the EPA to require a separate financial and compliance audit of a water pollution revolving fund in addition to a state's single audit.

The Single Audit Act of 1984

Since 1984, states have provided the federal government with an annual, independent, organization-wide audit, commonly referred to as a "single audit." [1] Prior to 1984, state and local governments generally audited the expenditure of federal financial assistance through separate reviews of individual programs. Congress found this grant-by-grant approach to be an "inefficient use of scarce audit resources, and an ineffective means of assuring accountability in the use of federal tax dollars." H.R. Rep. No. 708, 98th Cong., 2d Sess. 1, reprinted in 1984 U.S. Code Cong. & Ad. News 3955. Therefore, Congress replaced the "myriad of overlapping, inconsistent, and duplicative Federal audit requirements" with a single audit requirement. H.R. Rep. No. 708 at 1.

This single audit is intended to cover the entire operations of a state or local government. H.R. Rep. No. 708 at 9. It determines whether the recipient's financial statements are is order, whether the recipient has maintained adequate internal controls over its federal funds, and whether it has complied with Federal program requirements. H.R. Rep. No. 708 at 2. As such, the single audit should provide sufficient information to permit Federal officials to judge whether the internal controls in place provide reasonable assurance the recipient is managing federal assistance programs in compliance with applicable laws and regulations. H.R. Rep. No. 708 at 10.

With respect to the single audit's relation to other federal audit requirements, the statutory language is clear. A single audit "shall be in lieu of any financial or financial and compliance audit of an individual Federal assistance program which a State or local government is required to conduct under any other Federal law or regulation." 31 U.S.C. Sec. 7503(a). As such, the single audit requirement replaced any existing federal requirements for recipients to obtain financial or financial and compliance audits of individual federal assistance programs.

Of course, Congress may statutorily provide an exception to the Single Audit Act and require a separate financial and compliance audit of a particular program. However, here, Congress did not provide such an exception. On the contrary, Congress expressly provided that audits of the water pollution revolving funds must be conducted in accordance with the Single Audit Act. 33 U.S.C. Sec. 1386(b).

A separate financial and compliance audit of a water pollution revolving fund is precisely the type of audit Congress sought to replace with the single audit. Such an audit would result in unnecessary duplication of audit effort and, thus, be inconsistent with the Single Audit Act. Therefore, we conclude that the EPA may not require a separate financial and compliance audit of a state's water pollution revolving fund in addition to the state's single audit. [2]

1. The Single Audit Act requires each state and local government receiving more than $100,000 in federal financial assistance to obtain a "single audit" of its operations 31 U.S.C. Sec. 7502(a)(1)(A). State and local governments receiving between $25,000 and $100,00 in federal financial assistance may provide a single audit in lieu of other statutory or regulatory financial or financial and compliance auditing requirements. 31 U.S.C. Sec. 7502 (a)(l)(B). State and local governments receiving less than $25,000 in federal financial assistance are exempt from financial or financial and compliance audit requirements. 31 U.S.C. Sec. 7502 (a)(l)(C).

2. We note that the requirement for states to obtain single audits does not diminish the authority of federal agencies to conduct audits of federal financial assistance programs. 31 U.S.C. Sec. 7503(c). However, in conducting their own audits agencies must make use of the information provided by single audits to avoid any unnecessary duplication of effort. 31 U.S.C. Sec. 7503(a). Also, agencies must arrange for funding the cost of such additional audits, which include economy and efficiency audits, program results audits, and program evaluations. 31 U.S.C. Sec. 7503(e).