Model Audit Management System A System to Strengthen the Audit Management Ability of EPA Managers ------- Foreword EPA's Model Audit Management System A Tool to Strengthen the Audit Management Ability of EPA Managers The Agency makes significant investments of time and money in audits. Top management is committed to ensuring that EPA managers take complete advantage of this commitment and cap- ture the benefits that are returned from this investment. EPA spends five billion dollars a year to protect the environment. A large portion of this money is allotted to states, municipalities, and private firms in support of EPA efforts. It is a large task to monitor the funds spent and ensure that they are spent appropriate- ly. As EPA continues to face a limited availability of resources to accomplish its goals, audits become more important as manage- ment tools. The audit can help EPA managers improve the management of their programs. To receive the benefits that the audit process can produce, the Agency must develop positive working relationships between EPA managers and auditors. EPA managers must understand the audit process and work within the Model Audit Management System if the full benefits of the audit are to be realized. The audit process can help improve Agen- cy management and should be approached with this goal in mind. The following pages highlight the main features of EPA's Model Audit Management System and tell how it will help all Agency managers make use of the audit process. ------- Table of Contents I. Introduction 1 II. Scope of the Model 3 A. Personnel included in the Model Audit Management System 3 B. Audits covered by the Model 3 C. Time frame covered by the Model 3 III. Components of the Model Audit Management System .. .5 A. Roles and responsibilities 5 B. Communication channels 10 C. Corrective Action Tracking System 11 D. Relationship of the Model to EPA audit policies 12 Appendix A — Early Warning System Appendix B — Audit resolution directives ------- I. Introduction Audits are an Important Management Tool Each year, numerous audits are performed on the various programs, activities, and functions of the Environmental Protec- tion Agency (EPA). These audits are performed by the EPA Of- fice of the Inspector General (OIG), the U.S. General Accounting Office (GAO), and commercial audit firms. These audits often attract the attention of Congress, the public, and the media. Since these audits identify areas that need improve- ment within the Agency, external parties often use the results of these audits to point out deficiencies in Agency performance. Although audits are often viewed in a negative manner, EPA management firmly believes that audits can be used in positive ways to help further the goals of the Agency. Audits can help im- prove the effectiveness of Agency programs and lead to cost savings. Audits are an important management tool and can provide the Agency with valuable information. EPA's Model Audit Management System... What it is EPA developed a "Model Audit Management System" to improve the Agency's use of audits as a positive management tool. The Model Audit Management System will: • Enhance EPA's ability to "manage" an audit issue; • Help all EPA managers respond effectively and ap- propriately to audits; • Ensure the timely and appropriate resolution of audits; and • Keep senior management informed about sensitive or significant audit issues. The Model Audit Management System highlights and recom- mends three components: • Organization and staffing for audit resolution, including the roles and responsibilities of the Agency personnel in- volved with the audit process; ------- /. Introduction m Communication channels among offices to better iden- tify and respond to emerging audit issues; and • Corrective action tracking to allow Agency management to monitor the implementation of corrective actions and identify systemic weaknesses in programmatic and ad- ministrative areas. The recommended components of the Model Audit Management System have been constructed from the conclusions and recom- mendations presented in three previous reports for the EPA project entitled "Strengthening the Audit Management Ability of EPA Managers." These reports are: • "Review of the Audit Resolution Process and Assess- ment of the Follow-Up System;" • "Approaches to Develop an Early Warning System for the Audit Management Process;" and • "Developing a Corrective Action Tracking System." The Model Audit Management System reflects the views and ex- periences of Agency management and auditors regarding the audit process. ------- n. Scope of the Model A. Personnel included in the Model Audit Management System EPA developed the Model Audit Management System to improve the Agency's audit management process. The model will help all managers use the audit as a positive management tool. Senior EPA officials, managers, and all Agency personnel involved with audits are covered by the model The success of this model is contingent upon the cooperation of both EPA managers and the auditors. EPA management, the OIG, and the GAO have cooperated in structuring the model and com- mitting to its implementation. All parties must cooperate and work within the model to allow the Agency to improve its audit management capabilities. B. Audits covered by the Model The concepts presented in the Model Audit Management System apply generally to any audit of an EPA program, activity, or func- tion—including audits performed by the OIG, GAO and commer- cial audit firms. However, the model emphasizes the management of OIG internal audits and external audlis performed on grants and cooperative agreements. This emphasis exists because OIG external audits are often the most contentious—due to conflicts with external parties and the large dollars involved—and OIG internal audits are usually very visible and can require considerable management time and atten- tion. C. Time frame covered by the Model The Model Audit Management System covers the entire audit process—the time period before the audit, during the audit, through audit resolution, and the implementation of corrective ac- tions. The capability for successful and timely audit resolution must exist before any audit begins. After an audit begins, Agency managers and staff should devote appropriate attention to the audit process and work towards a cooperative and effective resolution. Correc- ------- //. Scope of the Model live actions should be well-planned and implemented in a timely manner. The guiding philosophy and components of the Model Audit Management System should be integrated with the daily activities of EPA management. Weaknesses in Agency programs and ac- tivities should be identified and continually addressed whether or not an audit is being conducted. ------- Components of the Model Audit Management System The Model Audit Management System consists of roles and responsibilities, communication channels, and a corrective action tracking system to monitor the implementation of corrective ac- tions. These components of the Model help guide the audit process within EPA and promote timely and appropriate audit resolution. A. Roles and responsibilities There are a number of key individuals who play important roles in the Model Audit Management System. The roles and respon- sibilities of these individuals as they relate to the audit resolution process are defined in EPA Order 2750. However, these key in- dividuals have additional responsibilities within the Model. The following paragraphs describe the additional responsibilities of these individuals within the Model. 1. Agency Follow-up Official The Assistant Administrator for Administration and Resources Management is the Agency Follow-up Official. This official is responsible for Agency-wide audit resolution and implementation of corrective actions. In addition to the responsibilities assigned in EPA Order 2750, the Official should: • Coordinate Agency-wide policy issues with the OIG; • Inform senior EPA officials of sensitive and significant audit issues so that they give appropriate consideration to those issues; and • Ensure that audit resolution occurs in a timely and effec- tive manner. 2. Agency Audit Follow-up Coordinator — Resource Management Division The Agency Audit Follow-up Coordinator reports to the Agency Follow-up Official. The Agency Audit Follow-up Coordinator: ------- ///. Components of the Model Audit Management System • Obtains audit planning information from the audit agen- cies and distributes relevant information to the ap- propriate audit follow-up coordinators in the regional offices, headquarters program offices, and laboratories; • Obtains from the OIG periodic listings of the OIG's "List of Potentially Significant Audits in Process," sum- maries of Flash Reports, and information on Special Reviews, and prepares reports on audits with sensitive or significant audit issues for the Agency Follow-up Offi- cial; • Receives from regional and headquarters program office audit follow-up coordinators all GAO and OIG internal audit reports and OIG external audit reports with sensi- tive or significant audit findings, and evaluates them to identify systemic problems that extend across program areas or regions and which would otherwise not be iden- tified individually; • Disseminates early warning audit information to audit follow-up coordinators and the Agency Foltow-up Offi- cial based on audit plans, audit reports, and other infor- mation supplied by the OIG; • Compiles audit follow-up information submitted from the regional offices, headquarters program offices, and laboratories for EPA headquarters management review; and • Prepares reports on audit resolution requested by Agen- cy management or any other external panics. 3. Action Officials Action Officials are either the respective Regional Administrators or Assistant Administrators, or their designees. • For internal audits addressed to a region, the OIG will send the report to the Assisant Regional Administrator for Policy and Management or the RA, depending on sig- nificance. For internal audits addressed to Headquarters, the OIG will send the report to the AA or an appropriate ------- ///. Components of the Model Audit Management System office director, depending on significance. The response back to the OIG should be from the Action Official named in the report • For external audits, the OIG will send the report to an ap- propriate Action Official based on general agreement with the RA/AA. The Action Officials ensure that managers and staff within their or- ganizations understand the audit process, cooperate with the auditors, and work toward timely and effective audit resolution. In addition, the Action Official ensures the quality of all audit respon- ses, regardless of which EPA personnel may prepare the responses. In addition to the responsibilities assigned in EPA Order 2750, the Action Officials should: • Encourage managers to identify and seek solutions to weaknesses and problems before they become audit is- sues; • Ensure that EPA personnel cooperate with the auditors and provide them with the information requested; • Respond to sensitive and significant audit findings that are identified, and notify the Agency Audit Follow-up Coordinator and senior EPA officials of potentially newsworthy issues, if deemed necessary; • Obtain annual audit plans from the OIG; • Receive draft audit reports from the auditors; • Direct distribution of copies of the final report to ap- propriate Agency personnel; and • Focus attention on the timely and effective resolution of audits. 4. Audit follow-up coordinators The audit follow-up coordinators are designated by the Action Of- ficials. ------- ///. Components of the Model Audit Management System • In the regional offices, the audit follow-up coordinator reports to the Assistant Regional Administrator for Policy and Management. • In all other reporting units, the audit follow-up coor- dinator is located within a management division. The audit follow-up coordinators have lead responsibility relating to the overall audit process within their organizations. The coor- dinators help prepare responses to audit reports, where appropriate, and exercise close oversight over the quality and timeliness of audit responses prepared by other EPA personnel. In preparing audit responses, the coordinators articulate the region's position on the audit in a manner that is responsive to the audit findings and recommendations and, at the same time, represents the Agency's position in a positive manner. In addition to the responsibilities assigned in EPA Order 2750, the audit follow-up coordinators should: • Review the audit plans received by their Action Official and alert the appropriate managers within their organiza- tions to the potential for an audit; • Serve as the initial contact point when an audit organiza- tion announces an audit; • Arrange for the entrance conference, notifying the ap- propriate managers, providing a meeting room, and preparing background materials on the audit process for those who need it; • Work with the auditors to provide them with required working space, notify managers of any special requests, and compile a list of Agency and audit personnel who will be involved with the audit; • Open channels of communication in other organizations within the regions or Headquarters in cooperation with the auditors; • Meet with managers and auditors at any progress meet- ings that are held during the audit; 8 ------- ///. Components of the Model Audit Management System • Relay to the Agency Audit Follow-up Coordinator, through the Action Official, any early warning informa- tion; • Distribute copies of draft audit reports from the auditors to the appropriate Agency personnel and provide guidance in how to construct an appropriate response to the report; • Make arrangements for the exit conference, inviting the appropriate people to attend and providing them back- ground information about what will be covered in the meeting; • Distribute copies of the final report to the appropriate Agency personnel and provide guidance in how to con- struct an appropriate response to the report; • Monitor the progress of audit resolution and alert their Action Official to any problems that may arise; and • Track the progress of corrective actions and provide the Agency Audit Follow-up Coordinator, through the Ac- tion Official, with required quarterly reports. 5. Staffing and skills EPA management must devote to the roles described above a level of staffing, with sufficient skills and knowledge, that can ac- complish the objectives of the Model Audit Management System. Background in an appropriate subject area—such as accounting or auditing—is helpful for Audit Followup Coordinators. Managers should develop these skills for persons involved in the audit process. In addition, managers must provide positive incentives for the timely and effective resolution of audits and for the implementa- tion of corrective actions. Senior management must provide posi- tive motivation for their staff to devote adequate time and attention to the audit process. Finally, audit management must be a continuous effort targeted for quick response by all Agency personnel. Managers who are faced ------- ///. Components of the Model Audit Management System with an audit management task must be allocated the time and resources that are necessary to complete the task effectively. Audit management cannot be viewed as an "add-on" assignment that is performed after "normal" management tasks are completed; rather, audit management must be an integral part of a manager's duties. B. Communication channels Communication between all parties involved in the audit is impor- tant throughout the audit process. Information exchanged between the Agency staff, the auditors, and Agency officials can increase the value of the audit For example, by improving the under- standing of program policies, potential findings, and preliminary recommendations, the audit process can proceed smoothly and the benefits can be implemented more quickly. Channels of communication should be maintained among the audit organizations, the audit follow-up coordinators in the regional of- fices and headquarters offices, and the Agency Audit Follow-up Coordinator in RMD. • EPA management should obtain from the OIG and GAO the in- formation that would help the Agency manage all audits performed in EPA. The Agency Audit Follow-up Coordinator should receive, summarize, and transmit to other audit follow-up coordinators the information obtained from audit organizations. This information would include annual audit plans and the listings of new audits in- itiated. • The auditors should communicate the scope and purpose of their audit to the Agency personnel in order to allow the personnel to provide the auditors with the information they need. • Agency staff must work with their audit follow-up coordinators to better understand the audit process and their roles and respon- sibilities within that process. • Agency managers must follow the procedures to alert senior offi- cials in regional and headquarters offices to the presence of or potential for sensitive or significant audit findings or audit reports. These procedures formalize the reporting relationships that current- 10 ------- ///. Components of the Model Audit Management System ly exist within the Agency and establish an "Early Warning Sys- tem" for audit management. • Audit follow-up coordinators in the regional offices and head- quarters offices should review all audit reports for their respective organizations and forward sensitive or significant issues to their Action Official The Action Official can forward the information to the Agency Audit Follow-up Coordinator, if deemed necessary. The Agency Audit Follow-up Coordinator can collect and analyze the audit information it receives from the audit follow-up coor- dinators throughout the Agency and disseminate the information that could prove helpful to the audit management efforts. (A more detailed discussion of the "Early Warning System" concept for audit management is presented in Appendix A of this paper.) C. Corrective Action Tracking System The Corrective Action Tracking System is a centralized system to monitor and manage the implementation of corrective actions re- quired to redress weaknesses identified during audits. The system provides the EPA with a management tool to use in the audit process, rather than a system that is an error identification and cor- rection mechanism. The Corrective Action Tracking System allows EPA to: • Enhance the Agency's audit management capability and assist in the formulation of Agency-wide policy by providing management information to identify recurrent operational problems and innovative and successful ap- proaches to corrective action implementation; • Reconcile data to companion systems in the Office of the Inspector General (OIG), Financial Management Division (FMD), Grants Administration Division (GAD) and Office of the General Counsel (OGC); • Improve status reporting by tracking the progress of cor- rective action implementation; • Retain historical data for future reporting needs; 11 ------- ///. Components of the Model Audit Management System • Maintain an official Agency record of corrective action status; and • Remain responsive to legislative demands, such as the in- formation processing and consolidation that would be re- quired under S.908 or other legislation. The system allows regional offices and headquarters offices to: • Analyze the progress of and the keys to successful cor- rective action implementation; • Make maximum use of existing resources, information, and reporting structures and build upon the current cor- rective action process; • Retain historical data for trend analysis and reporting; and • Reduce the time and effort necessary to respond to head- quarters inquiries and reporting requirements. Beyond reporting requirements, EPA management at all levels can use the tracking system to analyze the quality as well as quantity of "resolved" audits. D. Relationship of the Model to EPA audit policies The Model Audit Management System was designed to operate within the requirements established by existing EPA audit policies. These audit policies are contained in directives issued by Con- gress, OMB and EPA. A summary of the relevant directives is provided in Appendix B of this paper. 12 ------- Appendix A — Early Warning System A. Current audit communication channels The OIG has established procedures through which it notifies EPA management of significant findings identified in an ongoing audit. According to the OIG Manual, The following situations would require such notification: a. Survey reports which confirm a major national problem. b. Pilot audit reports which involve large dollars, major system deficiencies, or major differences of opinion be- tween OIG and program management. c. Multidivisional audits which confirm significant results. d. External audits by EPA staff which involve very large and unusual issues which would merit top management attention while underway. Flash reports and briefings are used to alert EPA management to significant audit findings and provide recommendations to address those findings. The OIG Manual states: Flash reports will generally be used to notify EPA top management in writing that significant issues have been identified and confirmed. Flash reports are appropriate for use when a situation exists which requires EPA top manage- ment to take immediate corrective action—Briefings are ap- propriate when the situation requires an open discussion with EPA top management. Aside from the information conveyed to EPA officials through OIG flash reports and briefings, however, there has been no formal "system" for Agency personnel to alert senior EPA officials to the potential for or existence of audits (performed by the OIG or the GAO) that may contain sensitive or significant findings. It has been incumbent upon lower- and middle-level Agency managers to alert senior officials to emerging audit issues that re- quire senior management attention. These lower- and middle-level Agency managers needed to rely upon their personal judgment ------- Appendix A—Early Warning System when deciding whether to inform senior management of the poten- tial for or existence of a sensitive or significant audit finding. The process to elevate an audit issue through successive levels of management has worked well with most audits. However, infor- mation pertaining to audit findings is not always transmitted quick- ly enough or sometimes fails to reach all the parties that could be affected by the disclosure of those findings, either within the Agen- cy or with the public. Although audits involving highly sensitive issues are encountered relatively infrequently—possibly two or three annually—these audits require a large investment of management time and atten- tion to address the sensitive issues. In addition, the inability of the Agency to respond quickly to the audit findings can lead to public criticism and embarrassment for EPA. Senior officials should al- ways be informed about sensitive findings in a timely manner, so their ability to take a proactive approach to the management of such findings is not restricted. B. Improvements to the audit communication channels To improve the communication concerning sensitive and sig- nificant audit findings, the Model Audit Management System in- cludes additional reporting procedures to enhance the audit information flow between the auditors, Agency managers, and senior EPA officials. The Agency audit communication network consists of four com- ponents: • Objectives that the system is .utended to achieve; • Criteria that define "significant" audit findings/reports and "sensitive" audit situations; • Agreements between the auditing organizations and the Agency to share the necessary audit information; and • Reporting procedures for Agency managers to follow to forward the appropriate audit information to senior offi- cials. it ------- Appendix A —Early Warning System These components collectively provide Agency officials with an "Early Warning System" that will communicate important audit in- formation. These components of the Early Warning System are dis- cussed below. 1. Statement of objectives Early warning procedures are meant to improve the flow of audit information in the Agency and help the Agency respond more ef- fectively to significant audit findings. The early warning network is not intended as a means for senior officials to "look over the shoulders" of Agency managers or "monitor" the managers' ability to respond to an audit. The Early Warning System: • Draws senior management attention to sensitive and sig- nificant audit findings and audit reports; • Enables the Agency to develop responses to significant audit findings and take corrective actions early in the audit process; and • Informs Senior officials of the progress of corrective ac- tions in order to allow them to respond effectively to public inquiries concerning a sensitive audit. 2. Criteria to identify "significant" audit findings/reports and "sensitive" audit situations The model audit management system establishes a number of criteria to help managers determine when they should inform a senior official of an audit finding or report. These criteria can be modified or enhanced according to the reporting requirements of individual regional offices or headquarters program offices, as well as to meet the needs of the headquarters administration. Specific criteria used to define a "significant" or "sensitive" audit finding or report include the following situations: • An audit results in questioned costs (Federal share) of $100,000 or more. • An audit results in questioned costs (Federal share) total- ing over 50 percent of the grant. ui ------- Appendix A —Early Warning System • A new program is audited for the first time. • The audit is conducted just prior to OMB budget review, Congressional appropriations hearings, or legislative re- authorization. • The program audited has recently been extensively covered in the media or has attracted substantial atten- tion from Congress. • A program is re-audited to determine if previous audit findings have been addressed and corrective actions taken. • The activities of a program have an immediate effect upon public health, or that is the perception of the public—e.g., asbestos removal, hazardous waste cleanup. • Large expenditures of funds are involved in the program audited and cost controls are known to need improve- ment. Agency managers should be informed that, if these criteria apply to an audit, the senior officials should be notified. Agency report- ing requirements established under the Early Warning System should be followed in these circumstances. 3. Audit information transfer between the auditing organizations and the Agency EPA management has established agreements with the OIG and GAO to obtain the information to help the Agency implement this Early Warning System. The Agency Audit Follow-up Coordinator will obtain information pertaining to audits planned, ongoing audits that are identified by the auditing organization as sensitive or significant, or audits com- pleted that may have implications for Agency-wide policy. Specifically, the Agency Audit Follow-up Coordinator will obtain the following items from the OIG: • Annual audit plans. IV ------- Appendix A —Early Warning System • Quarterly updates of the annual audit plans. • Periodic listings of new audits initiated. • List of audits in process that may contain significant or sensitive issues.. • Notification of and information on Flash Reports. • Information on Special Reviews on a case-by-case basis, as deemed appropriate by the OIG. The Agency Audit Follow-up Coordinator is responsible to meet with GAO officials on a periodic basis to discuss the potential areas for audit and determine what audit issues the Congress may consider sensitive or significant. To ensure that all regional offices and headquarters program of- fices receive the necessary audit information, the Agency Audit Follow-up Coordinator receives, summarizes, and transmits to other office audit follow-up coordinators the information obtained from the audit organizations. Based on the information obtained from the written materials, the Agency Audit Follow-up Coordinator will identify the potential for or existence of audit findings or reports that warrant the atten- tion of senior EPA officials. When the Agency Audit Follow-up Coordinator has questions about the audit, the coordinator will dis- cuss these with the Action Official or his designee. On a regular basis (e.g., monthly) the Agency Audit Follow-up Coordinator should transmit to the designated Agency officials a summary of potential or actual audit findings containing sensitive or significant issues. This communication is intended to keep senior EPA officials throughout the Agency informed about sig- nificant audits and to help them respond effectively to developing audit issues. 4. Reporting procedures The audit information under the early warning system flows through three primary channels within the Agency: ------- Appendix A — Early Warning System • The existing management reporting relationships (OIG/GAO - regional/program management - RA/AA - EPA Administrator); • Early warning reporting incorporating audit follow-up coordinators in each regional office and headquarters program office (OIG/GAO - regional/program office audit follow-up coordinator - RA/AA - Agency Audit Follow-up Coordinator - EPA Administrator); and • Early warning to transmit audit information between headquarters and regional offices (OIG/GAO - Agency Audit Follow-up Coordinator - regional/program office audit follow-up coordinators). These three communication and reporting channels are described in the sections that follow. • Existing management reporting relationships. The existing management reporting relationships within the Agency will con- tinue to operate within the scope of the Early Warning System. Both formal and informal communication among all levels of management will need to continue. Based on the program manager's assessment of the audit situation, that manager will decide when it is appropriate to forward audit information to higher management. The criteria clarifying sensitive and sig- nificant audit findings help the manager decide when to elevate an audit issue. The existing management reporting relationships dictate that the program manager will forward the audit information to senior management within the appropriate office. If the audit is con- ducted within a regional office, the RA may be notified. If the audit is conducted within a headquarters office, the AA may be notified. If the issue warrants more senior attention, the EPA Ad- ministrator may be notified. The senior officials should be in- formed of the status of the audit, the sensitive or significant issues involved, and any corrective actions taken or proposed. • Early warning reporting procedures incorporating audit follow- up coordinators. Audit Followup Coordinators should review their organizations' draft and final internal audit reports, external audits with significant findings, and any progress reports supplied VI ------- Appendix A — Early Warning System by program managers. Using these reports, the coordinators deter- mine the potential for or existence of sensitive or significant issues and forward these issues to the RA/AA. Having the audit follow-up coordinator responsible for Agency- wide audit information establishes a new communication channel in the audit management process. The Agency Audit Follow-up Coordinator serves as a central audit information review point at which certain audit findings and reports can be evaluated to iden- tify the potential for or existence of audit issues that could have im- plications for Agency-wide policy. Audit Followup Coordinators will send to the Agency Audit Fol- lowup Coordinator, through the RA/AA (or designee), all draft and final internal audits. As appropriate, the RA/AA should forward these reports with a summary of the potential policy implications identified by the senior official. By allowing the Agency Audit Follow-up Coordinator to review all GAO and OIG internal audit reports, regardless of whether the RA/AA believes it contains sen- sitive or significant findings, the Agency should increase its ability to identify systemic problems that extend across programs or regions and which would otherwise not be identified by an in- dividual RA or AA. Due to the large volume of OIG external audits, the same review procedure would not be practical for the Agency Audit Follow-up Coordinator. Therefore, OIG external draft and final audit reports will be reviewed by the regional office or headquarters program of- fice audit follow-up coordinator to determine the potential for or existence of sensitive or significant audit findings. Using the early warning criteria for "significant" or "sensitive" findings established by the Agency Audit Follow-up Coordinator, the regional office or headquarters program office audit follow-up coordinator will review the OIG external audit reports and forward the relevant audit issues to the Agency Audit Follow-up Coor- dinator. As the Agency Audit Follow-up Coordinator receives in- formation about the external audit findings, the appropriate audit information will be forwarded to senior EPA management as necessary. vu ------- Appendix A — Early Warning System • Early warning procedures to transmit audit information from headquarters (RMD) to regional offices and headquarters program offices. The early warning procedures to transmit audit information from the Agency Audit Follow-up Coordinator to the regional offices and headquarters program offices represents a new communication channel created within the Early Warning System. As the potential for or existence of sensitive or significant audit findings is identified by the Agency Audit Follow-up Coordinator, the Coordinator will forward the information to the audit follow- up coordinators in the appropriate regional offices and head- quarters program offices. No matter how sophisticated the Early Warning System used in the audit management process, senior EPA officials will need to continue to rely upon open communication among all levels of management and the proper attention of program managers to the audit process in order to respond effectively to sensitive and sig- nificant audit findings. In addition, Agency officials will need to work closely with OIG and GAO officials to ensure that open com- munication exist between the program managers and auditors. The effectiveness of the Early Warning System will be influenced heavily by the quality and timeliness of information exchanged be- tween program managers and audit managers. Vlll ------- Appendix B —Audit resolution directives A number of policies govern the audit process within EPA. These policies are implemented through directives issued by Congress, OMB, and the Agency. EPA's Model Audit Management System incorporates the guidance provided by the directives summarized below. A. OMB Circular A-50 OMB Circular A-50 provides the policies and procedures for agen- cies to follow for audit resolution. OMB Circular A-50 defines "resolution" as: "For most audits, the point at which the audit or- ganization and Agency management or contracting officials agree on action to be taken on reported findings and recommendations." The Circular specifies the roles of audit follow-up officials and the Inspectors General and establishes procedures for audit resolution. Circular A-50 also requires the establishment of a system to monitor and to track the progress of corrective actions, the im- plementation of audit recommendations, and the documentation of improved accounting and collection controls. Agencies are required to assign high priority to audit resolution and corrective action via: the appointment of top-level personnel to the audit resolution process; the establishment of specific criteria with milestones to ensure timeliness of audit resolution; and the structuring of a periodic evaluation of audit recommenda- tions to identify and redress any problems endemic to the current audit follow-up system. OMB Circular A-50 specifies that audit resolution shall be made within a maximum of six months after is- suance of a final audit report. B. OMB Circular A-128 OMB Circular A-128, in response to the Single Audit Act of 1984, requires audits for all major programs with expenditures totalling more than $300,000 or 3% of federal expenditures, whichever is greater. Governments receiving less than $25,000 are exempt from any audit requirements. In addition, A-128 requires that all instan- ces of "material" findings be reported for both major and non- major programs and that audit reports identify all amounts questioned for each federal program. ------- Appendix B —Audit resolution directives As a result of the Single Audit Act, any audit performed must in- clude tests and reviews of the validity of costs as well as general determination of the eligibility of recipients, compliance with matching contribution requirements, the "reasonableness and fair- ness" of financial reports, and cash draw-downs via advance or let- ters of credit. C. EPA Order 2750—Management of EPA Audit Reports and Follow-up Actions The manual serves as the formal EPA directive establishing audit terminology, assignment of responsibilities, a time frame for the implementation of corrective actions, and the process for resolving internal and external audits. As stated in its scope and ap- plicability section, the directive applies "Agency-wide to all find- ings and recommendations included in internal audits and in pre-award, interim, and final audit reports covering EPA grants, cooperative agreements, and direct contract procurement." This directive serves as guidance for all programs and activities in- volved in the audit resolution process. D. EPA Order 2780.1B—GAO Audits: Agency Relationships With GAO and Responsibilities for Follow-up Actions EPA Order 2780.IB and its companion piece, EPA Order 2750, constitute the EPA response to OMB Circular A-50. EPA Order 2780.IB establishes policies, procedures, and assigns respon- sibilities that govern audit relationships between EPA and the General Accounting Office (GAO). The Order also prescribes pro- cedures for EPA follow-up to GAO audit findings. E. EPA Office of Inspector General Manual The manual contains the policies, standards, and guidelines for the EPA Office of the Inspector General. Chapters 104,105,109, 111, 112, and 150 are the primary chapters involved with audits and audit follow-up. These chapters cover the audit from the sur- vey phase, review of operations, nature of presentation of audit findings and recommendations, review and issuance of audit reports, distribution or audit reports, and special reports. These u ------- Appendix B —Audit resolution directives chapters formulate the procedures to be used in conducting audits as well as incorporate the Standards for Audit of Governmental Or- ganizations, Programs, Activities, and Functions issued by the Comptroller General of the United States. F. AA and RA Directives Assistant Administrator and Regional Administrator directives es- tablish methodologies for the resolution of audits. Particular regional practices may vary, but each region derives its authoriza- tion and formulates its procedures based on EPA Orders 2750 and 2780.IB, OMB Circular A-50 and 40 CFR Part 30. Regional directives provide the most specific guidance pertaining to the es- tablishment of final authority and responsibilities for audit resolu- tion within a regional office. They can define terminology used in the audit process and establish interim reporting deadlines during audit resolution. Regional directives can cover guidelines for the review of audit findings, including criteria for acceptability of responses, and for the coordination of responses to audit findings between the region and the OIG. Regional directives can also establish procedures for the issuance of bills for collection and for the documentation of audit close-out G. 40CFRPart30SubpartL This directive in the Code of Federal Regulations governs grants for assistance programs. Subpart L is the section that sets forth procedures for resolving assistance disputes between EPA officials and assistance recipients of applicants. H. Comprehensive Audit Manual This manual is published by the General Accounting Office and details the guidance and protocols for audits conducted by the GAO. This manual is one of several publications issued by the GAO explaining and supplementing the standards and demonstrat- ing how auditing can improve efficiency and effectiveness of government operations and programs. m ------- Appendix B —Audit resolution directives I. Standards for Audit of Governmental Organizations. Programs, Activities, and Functions The standards are published in what is commonly referred to as the GAO "Yellow Book." The standards are to be followed by the Federal auditors and all non-Federal auditors who perform audits of Federal organizations. The standards include those established by the American Institute of Certified Public Accountants for financial audits and establish additional guidance for non-financial audits. IV ------- |