Government audit of trillions of dollars in subsidies reveals problems

tom temin If your government agency awards grants, you probably know about the Federal Audit Clearinghouse. That is where the so-called single audit takes place. A single audit of expenditures by recipients of non-federal grants or subsidies is required by law. The Comptroller's Office found several problems with the overall process at the clearing house operated by the General Services Administration. Government agencies do not have the data necessary to conduct a single audit. We obtained details from Jim Dalkin, GAO's Director of Financial Management and Assurance. Jim, it's good to have you back.

Jim Dalkin Thank you, Tom. I'm glad to be with you.

tom temin Now, these single audits are required by law, right? What are the requirements here? What is a single audit? Who needs to do it?

Jim Dalkin yes. The Single Audit Act of 1984 required that grants issued by the federal government be audited. The dollar threshold is $750,000. Therefore, grants over $750,000 will be audited once. And typically what happens is that federal agencies distribute grants. Sometimes it goes to the state, sometimes it goes to nonprofit organizations.

tom temin Understood. So, will the audit be done by the funding agency or who will do it? In other words, there is no DGAA like DCAA.

Jim Dalkin yes. Grants are typically audited by a CPA firm. And that's the process normally used.

tom temin And the clearinghouse is a list, a virtual place where all grant information resides and people are supposed to know what to audit.

Jim Dalkin Yeah. So there were about 40,000 single audits in a given year and we needed a clearinghouse to host all those audits. There's also a lot of data you can get to see if there's a problem, identify trends, etc. Traditionally, that data was kept by the Department of Commerce. And in 2023, he transferred it to GSA.

tom temin Okay. So, just to be clear, the clearing house includes the results of the audit. But does it also include source institution and grant information?

Jim Dalkin yes. For the database, the requirement is that the recipient submits an annual audit, which is uploaded to the database. So you can determine important information about the grantee, important information about the audit. In particular, if there are issues with audits, they are flagged as valid. You can identify them through this process.

tom temin right. In other words, because the audit is conducted by an external third party, the authorities may want to make sure that the third-party external auditor did not discover that any funds were being disbursed in the Jim Beam Scotch case. , some kind of check needs to be done. Well, it's not just Scotch.

Jim Dalkin Other types of control issues.

tom temin right. Okay. By the way, this is also bourbon. You need to change it — you need to edit it. So, what did you find when you looked at the clearinghouse? What are the issues that caused the auditor to audit?

Jim Dalkin Now, the clearinghouse has many challenges. Of course, there are about 40,000 reports in any given year. But there was a problem with the data. There are consistency issues between reports and how they are reported. There are also some data limits. So in a world that's moving towards using data and mining data, there are some inherent limits to what systems can maintain. And perhaps most importantly, a number of issues were identified. There is a problem from a level perspective. And because we found problems that appeared to be significant and persistent, that meant there were significant internal control issues in the report. And by continuous, I mean those problems continued for over a year with him. So if it's severe and persistent, that should raise a red flag. And we don't know the extent to which the clearinghouse was monitored to identify and resolve those findings.

tom temin I'm talking to Jim Dalkin. He is the Director of Financial Control and Assurance Affairs at the Government Accountability Office. Before we get into the specifics, is there an information exchange operating like the SEC Edgar system? If so, does the regulated entity upload data in a specific format for the clearinghouse? Does the external auditor follow a set procedure for uploading information?

Jim Dalkin Yes, in some ways it's similar to Edgar in that the data is held there and you can access that information.

tom temin Okay. So what problems were found? Are they the result of the uploader, the auditor, or some government function?

Jim Dalkin Well, it was a combination. I think some reports were missing. Several reports had editing or typographical errors. Some reports were limited in their ability to dig into some issues.

tom temin Therefore, it is difficult for the institutions issuing those grants to know whether their expenditures were appropriate.

Jim Dalkin yes. The whole purpose of doing these single audits is to somehow ensure that the database should be useful because the federal grants are being used in some way and the controls are being looked at. But what we actually discovered was that there were areas in the database that could really be strengthened. And, in part, this report is so timely because this report is on the move or from the Department of Commerce he was moved from one agency to his GSA. Therefore, the new system had some opportunities to develop useful modifications to that data.

tom temin By the way, is there an alert system that lets me know when a particular grant agency on the federal side is “ready for audit”?

Jim Dalkin That's a good question. And I think that's one of the opportunities to add additional functionality to the new system.

tom temin So we made some recommendations to GSA to improve data management and the database systems that underpin all of this.

Jim Dalkin Ultimately, we made 10 recommendations, four to GSA and six to the Office of Management and Budget.

tom temin What do you want GSA to do? Start there.

Jim Dalkin Well, GSA has some opportunities. There are several opportunities to perform enhanced data checks. There are several opportunities to consider the reliability of your data. They need to step back and look for features. I call them extensions for data mining. There is also coordination. Some of these grants span multiple institutions, and coordinating and tracking funding can be difficult. So there are some opportunities there. And finally, I said we need to develop training to improve the quality of data entry.

tom temin So what about OMB?

Jim Dalkin For OMB, there is a requirement to conduct a quality review. We pointed out that a quality review had not been done for many years. We have therefore flagged it as a recommendation for further quality review. We also asked them to develop a process to identify when reports are missing. So if a grantee doesn't file, how does OMB know they didn't file? Finally, there's the issue of crossover programs and how multiple agencies provide funding. We revisited the issue of tracking funds when And when you look at the overall risk. So if we take a step back, given the serious and persistent problems, what do we know about OMB management and how can we address some of these unresolved issues?

tom temin By the way, we're not talking about frivolous money. Your report has a graph that shows the severity and persistence of a single audit finding by direct expenditure, and for that period from 2017 to 2021, 25% of direct expenditures with consequences It's equivalent to 3/3. It can be severe or persistent. So in addition to the data management issues around the reporting itself, there are also the spending issues themselves.

Jim Dalkin Yes, this is a significant expense. Federal aid from 2017 to 2021, the period we covered, was about $7 trillion. And of those grants, we found that about 1 trillion, as you mentioned, were tough and durable. So these grants were problematic.

tom temin Therefore, one might say that supervisory systems will be strengthened, uniform data collection from audits will be strengthened, and governments will be able to jointly manage subsidies better.

Jim Dalkin Yes, the better the data, the better the systems in place to monitor that data, which can be very helpful in terms of identifying trends and issues that are occurring within your grant program.

tom temin Clearinghouses appear to be candidates for the high-risk list.

Jim Dalkin Well, I can't speak to the high-risk list, but I'm sure there's a lot of money flowing on an annual basis. I think it was about $1.1 trillion in 2023. And again, it was about 40,000 audits. I mean, it's very important.

tom temin Well, I'm old enough to remember when the government only wasted billions of dollars at a time. Jim Dalkin is Director of Financial Management and Assurance at the Government Accountability Office. Thank you very much for your participation.

Jim Dalkin Thank you, Tom.

tom temin See this interview and a link to his report at federalnewsnetwork.com/federaldrive. Subscribe to Federal Drive wherever you get your podcasts.