August 1999

Three Generations of Comptrollers General

By James L. Craig, Jr.

In Brief

More than Just a Watchdog

The terms of the three living comptrollers general span the period from 1966 to 1999. During those 33 years of leadership, much has happened that affected the public accounting profession--among it the first set of yellow book government auditing standards, the Single Audit Act of 1984, examination of auditor performance at failed savings and loan organizations, and, most recently, the audit of the consolidated government-wide financial statements.

The CPA Journal asked the three CGs to explain the GAO's contributions to the profession and to explore how the GAO can continue to help maintain a healthy, viable profession.

As chief executive officer of the U.S. General Accounting Office (GAO), when the comptroller general (CG) speaks, Congress listens. Presidential appointment to a 15-year, nonrenewable term gives the CG a degree of independence and credibility that is among the highest of all government officials. The GAO started out primarily as Congress's watchdog, monitoring the spending of the executive department and agencies. In its earliest days, it examined every voucher the executive agencies submitted for payment. After the backlog reached 35 million vouchers at the end of World War II, the GAO began auditing programs rather than checking individual documents.

The Budget and Accounting Procedures Act of 1950 moved the GAO in the direction of establishing standards for Federal programs and looking into their effectiveness. A budget act of 1974 further changed the work of the GAO by making it responsible for providing information to congressional committees.

Establishing standards and responding to congressional committees has brought the GAO and the comptroller general into direct contact with the CPA profession. The GAO's 1996 report, The Accounting Profession: Major Issues, Progress and Concerns, is an in-depth analysis of the profession's response to criticism regarding its primary role of providing integrity to financial reporting.

The three living comptrollers general are Elmer B. Staats, who served from 1966 to 1981; Charles A. Bowsher, who served from 1981 to 1996; and David M. Walker, who was appointed in 1998.

As part of its Millennium Series, The CPA Journal asked these three leaders to explain the GAO's interaction with the profession and to give their views on how the profession can continue to effectively serve the capital markets and the public.

The Leadership of the Comptrollers General

Elmer B. Staats. It was during Staats' term that the GAO greatly broadened its role to include the CPA profession's traditional sphere of influence. Congress decided that many of the social programs of the "Great Society" under President Lyndon B. Johnson needed to be audited. In response, the GAO issued in 1972 its first "yellow book" of Federal auditing standards, Standards for Audit of Governmental Organizations, Programs, Activities, and Functions.

When Staats began his term, he found that the only standards that existed were for audits of defense contracts. He felt that standards had to be developed for monitoring or auditing all government programs. Development of the first yellow book was a three-year project. Renamed Government Auditing Standards, the yellow book was revised once under Staats and twice more under Bowsher. The yellow book standards are used by all Federal auditors, most auditors of state and local governments, and some auditors in foreign countries. Practice under those standards is perhaps the most demanding of all areas for public accountants and governmental auditors, due to required reports on internal control and compliance with laws and regulations. Little did Staats know that that first book with its yellow cover would have such a profound and far-reaching effect on the public accounting profession.

During Staats' term, Congress granted the GAO the authority to audit the IRS, the Federal Reserve System, the FBI, and a number of international programs. During the Vietnam War, the GAO established an office in Saigon, not to look at military structure, but rather to look at the issues of military supply and the proper handling of war refugees.

As a condition of the Federal loan guarantee of New York City's debt during its financial crisis in the 1970s, the GAO was called upon to monitor the city's progress and compliance with the various covenants. Under Staats, the GAO was also directed to oversee the Chrysler Corporation during the time of Federal loan guarantees.

Staats feels that one of his accomplishments was to increase the training of the GAO staff. His service on the Arthur Andersen public review board revealed to him that that firm was spending 10­12% of its budget on training. The GAO never reached that level, allocating approximately three percent to training under Staats. "Without the skills, the job can't be done effectively," he said. "Government is getting more and more complex, just as the private
sector is."

Charles A. Bowsher. Perhaps on a par with the first yellow book in terms of its impact on the accounting profession was the Single Audit Act of 1984. The GAO and Bowsher were at the heart of the legislation, which for the first time required that all state and local governments receiving $100,000 or more of Federal assistance be required to have an entity-wide audit of their financial statements with additional procedures and auditor reporting on
compliance with laws and regulations and internal control over Federal programs. The act was a defining moment for the profession, because it forced the profession to develop reporting standards to comply with the act and the implementing OMB circular A-128.

Under Bowsher, another large step was taken in financial reporting and expanded audit requirements: passage of the Chief Financial Officer's Act of 1990, which began the process for audits and internal control reports of Federal agencies. This was the precursor to legislation during Bowsher's term that extended audit coverage to 23 major agencies and ultimately led to the long-sought audit of the consolidated financial statements for the Federal government. The first such audit was completed for the year ended October 31, 1997.

Although it did not directly affect the accounting profession, an important development during Bowsher's term was the requirement for the GAO to report to Congress on budget deficits. In Bowsher's view, this reporting contributed to and helped motivate the Federal government to achieve budget surpluses.

It was also under Bowsher that the GAO was called upon to comment directly on the effectiveness of the accounting profession. Bowsher signed the GAO report that revealed deficiencies in the audits of failed
savings and loan organizations. Although defenders of the profession felt the report's conclusions were biased--because they were not based upon a representative sample of all audits of savings and loan associations--the report clearly identified substandard work and the need for more careful and skeptical auditing, especially in entities and industries undergoing financial stress. The report was especially critical of the independent auditors' failure to report serious weaknesses in internal controls to the savings and loan organizations and their regulators.

One of the final activities under Bowsher that affected the accounting profession was GAO's 1996 report The Accounting Profession: Major Issues, Progress and Concerns. The work leading to the report started under a Democratic Congress that wanted to know whether securities liability reform granting relief to the accounting profession was justified. Presumably the legislators would only be interested in giving the profession the benefits of reform if it itself had been responsive to the public interest. But while the two-year study was under way, the Democrats lost control of Congress. The document, more in the nature of a report card without specific recommendations for action on the part of the profession, was delivered to a Republican Congress, which has not, to date, taken any action on it.

David M. Walker. It is too soon to pass judgment on the interaction between the GAO and the accounting profession under Walker's leadership. In a March 23, 1999, speech in Washington, D.C., as part of a new business in government lecture series, Walker said the GAO is dedicated to the concept of "good government." It is the GAO's job, Walker said, "to help continuously improve the economy, the efficiency, and the effectiveness of government for the benefit of the American people.

"The GAO has an obligation to provide leadership in the areas of accounting, reporting, auditing, evaluation, and analysis of Federal government programs," Walker said. But he believes the GAO should concentrate on improving performance and accountability. As evidence of this, the GAO issued, in January 1999, a new performance and accountability series: Major Management Challenges and Program Risks. This series, along with the GAO's high risk series, will be issued at the beginning of each new Congress during Walker's term.

The Audit of the Federal Government

No discussion of the interaction between the GAO and the accounting profession would be complete without noting the GAO's efforts to audit the consolidated financial statements of the U.S. government. Under the direction of GAO Chief Accountant Philip Calder, the first report was issued in March of 1998. Ironically, the report was issued during a period when the GAO was led by an acting comptroller general; Bowsher, under whose leadership the project began, saw his 15-year term end before the first audit was completed. Walker was the first comptroller general to sign the audit report on the U.S. government's consolidated financial statements in March 1999.

The GAO's report on the Federal government demonstrates its continued interest in more effective auditor communication: It combines the opinion on the financial statements with reports on internal controls and compliance with laws and regulations. The report is important from a variety of perspectives, including the fact that the U.S. government is the largest, most diverse and complex governmental entity on earth.

It remains a mystery as to why this landmark event received little fanfare. The GAO disclaimed an opinion on the consolidated statements for a number of reasons, including major deficiencies in internal controls at very important agencies such as the IRS. But there have been no calls for investigation or resignation of high officials--only the taxpayers' money is involved. Staats says it's because audits are not glamorous to the public. What the public wants, in his view, is personal scandal, not deficiencies in internal control.

Essential to the production of government-wide financial statements was the development of accounting principles to use for the unique aspects of Federal government operations. Issues such as valuation of the assets that make up the huge military complex and the liabilities that make up the Social Security system had to be addressed.

Staats, long retired as CG at the time the audit was conducted, served as chair of the Federal Accounting Standards Advisory Board from 1990 to 1997. The board worked diligently to have accounting principles in place that would enable the preparation of auditable government-wide financial statements.

"That's what we were striving for, and that's what has now been accomplished," Staats said.

The GAO's report on the audit of the Federal government refers to audit reports of other independent public accountants that audited certain subsets of the consolidated statements. From the profession's perspective, at some point it would be appropriate to further privatize the audit.

A Changing CPA Profession

The CPA Journal asked the three comptrollers general about the performance of the accounting profession and its need to change to accommodate a growing and complex world.

Bowsher, perhaps the comptroller general most actively involved with the profession, feels it has responded to the many changes that have occurred, albeit at times somewhat slowly. "That is the history of the CPA profession, which is not a bad history," Bowsher said.

Bowsher and Walker--both former partners at Arthur Andersen--are concerned by the consolidation that is sweeping the profession. Bowsher likes the idea of a Big Eight more than a Big Five. Walker understands the benefits to clients of an expanded array of services that includes consulting, but strongly believes that auditor independence, both in fact and in appearance, cannot be compromised. Bowsher, quite logically, feels that it has been good for the profession. However, he feels the spinning off of consulting practices now being negotiated is very worrisome.

Staats agrees that the profession has adequately responded to changing conditions. He notes that the SEC has a large role to play here and that recent initiatives from Chair Arthur Levitt along with the actions of the stock exchanges in looking at audit committees and the Public Oversight Board in examining audit effectiveness are important developments toward safeguarding the public.

The Importance of Internal Control

Under Bowsher, the GAO placed a great deal of emphasis on reporting on internal control and compliance with laws and regulations. During the study period for the 1994 revision of Government Auditing Standards, the GAO considered prescribing an expanded auditor's report that would include internal control and compliance with laws and regulation reporting as part of the report on financial statements. The auditor's report on the financial statements of the GAO itself includes such an expanded report by its independent public accountant. The final 1994 yellow book revision did not specifically call for an expanded report of the kind the GAO itself used.

Bowsher still believes that internal control reporting by independent auditors is important. "With poor controls, you have lax programs, scandals, and many other problems such as cost overruns," Bowsher said.

Walker believes that controls are important in improving government performance and assessing accountability. Staats would not argue with Bowsher's emphasis on internal controls. The Federal Accounting Standards Advisory Board spent a great deal of time on internal control.

But the whole issue of mandatory auditor reporting on internal controls seems to be a minor concern of the regulators at the moment. As a result of the savings and loan crisis and the Federal Deposit Insurance Corporation Improvement Act of 1991, there is now auditor reporting in the banking industry; however, there is no visible movement toward it in other industries. Will it take another major financial crisis for the public to realize that problems would have been more quickly detected had there been mandatory reporting on internal control? If that occurs, the GAO and the comptrollers general will be in a position to say "I told you so."

The GAO:
Keeping the Profession Relevant

Will the GAO continue to be a player in shaping the profession and contributing to its ability to remain relevant and viable? In many respects this will be determined by the mood in Congress. With the Republicans in control, there seems to be little interest in having the GAO embark on any major investigation of the profession's performance. That, of course, could change quickly. Staats, however, thinks that the basic structure of the Office of Comptroller General is protected from politics because of the CG's 15-year nonrenewable term.

"The GAO must do its job with independence," Staats said. Once or twice members of Congress expressed concern about what the GAO was doing during his term--but Staats would respond that he took an oath of office that he intended to keep.

"The strength of the GAO is its public reports," Staats said. The GAO will, however, continue to reevaluate the effectiveness of yellow book auditing standards.

Perhaps most importantly, the comptroller general is an influential official, listened to by Congress and the press. The GAO reports have been an instrument of change. What the GAO will do next to help maintain a relevant and viable profession is in Walker's hands. He believes the GAO can help ensure that the profession 1) focuses on information relevant to financial statement users, 2) emphasizes the broader issue of accountability versus accounting and auditing, and 3) maintains its objectivity and independence, in both fact and appearance. *


ELMER B. STAATS was the deputy director of the budget under four different presidents prior to his appointment as comptroller general.

CHARLES A. BOWSHER, CPA, was appointed comptroller general in 1981 by President Ronald Reagan. At the time of his appointment he was a partner of Arthur Andersen & Company. He had been with the firm for 25 years except for a four-year period during which he served as the Navy's assistant secretary for financial management.

DAVID M. WALKER, CPA, became the seventh comptroller general on November 9, 1998. Immediately prior to his appointment, he was a partner and global managing director of Arthur Andersen LLP, human capital services practice. Previously, Walker held a variety of executive positions in the Federal government. Prior to his government service, his career included experience in the firms of Price Waterhouse, Coopers & Lybrand, and Sources Service Corporation.

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