Transforming Government, by Example

Transforming Government, by Example
An Interview with David M. Walker

By Donald E. Tidrick

In Brief

Making the GAO a World-Class Organization

David M. Walker is the seventh Comptroller General of the United States. He was nominated by President Clinton in 1998 and that year confirmed unanimously by the U.S. Senate for a 15-year term. He started his career with Price Waterhouse, and has held executive positions in both the private and public sector. More information about Walker and the GAO can be found at www.gao.gov.

he General Accounting Office (GAO) is employed by the U.S. Congress and, ultimately, the American people. Its many duties include auditing, analyzing, researching, and investigating the federal government’s past, present, and future finances. David M. Walker is the Comptroller General, making him the head of the GAO as well as chair or member of many other committees and organizations. His unusually long term gives him 15 years to achieve the goals he has set for himself and the GAO. He credits his appointment to his diverse experience in the public and private sectors as well as his background in the issues that are likely to be seen throughout his service as Comptroller General.

This interview took place in conjunction with Walker’s visit to Northern Illinois University for an address to accountancy students and faculty. The author recounts Walker’s explanation of his responsibilities, his duties, and his long-term goals for the GAO. Walker spoke of what goes into making crucial decisions in sensitive areas and the challenges he faces in getting things done and making a difference. The interview includes his responses to the new standards being set and the future of the accounting profession. Walker offers a positive outlook on what is to come and how to improve what is currently being done.

Donald E. Tidrick for The CPA Journal: What are your responsibilities as Comptroller General?
Walker: I am the chief accountability officer of the United States government and the chief executive officer of the GAO. I am chairman of the Joint Financial Management Improvement Program and chairman of the U.S. Intergovernmental Audit Forum and the Center for Continuous Auditing. I am a member of a variety of boards and committees, including chair of the Strategic Planning Task Force for the International Organization of Supreme Audit Institutions (INTOSAI). That is the professional organization of auditor generals for more than 170 countries around the world.

CPAJ: How did you come to be appointed Comptroller General in 1998?
Walker: The appointment process for Comptroller General is not exactly a model of efficiency. It is unusual because the CG’s term is 15 years, which is the specified longest term for any position in government. The statutory process involves the 10 leaders of the Senate and the House. They must identify at least three candidates to recommend to the President. The President must select a nominee and the Senate must confirm that person. The process started with about 60 candidates and, after about a year and a half, I was fortunate to be selected.

There was clearly a strong interest in having someone with significant experience in both the public and private sectors. My track record of success in both helped make my case. I also believe my background and experience dealing with several key issues likely to be important during my term helped to improve my chances. I was fortunate to have strong bipartisan support based on my prior public service as head of two executive branch agencies. In my view, it is more difficult to succeed in leadership positions in government than in the private sector. In government there are statutory and regulatory restrictions as to what one can and cannot do in a variety of areas like human capital and contracting in the public sector. Congress and other players have significant influence. The transparency in government is greater, and almost everything one does is subject to public scrutiny and possible criticism.

CPAJ: What would you identify as your accomplishments since you were appointed?
Walker: An immediate challenge was to better position the GAO for the future. Prior to my appointment, the GAO had been downsized and their relationship with Congress needed attention. Performance rewards had been eliminated and significant cutbacks in training and technology investments had been made. We have made great progress in leading government transformation by example while better positioning the GAO for the future. Our performance outcomes have also significantly increased across the board. We have taken steps to improve our consistency and transparency in a connection with a variety of client, agency, and other activities. The GAO has probably changed more in the last two years than in the previous twenty, and we are going to experience an even more rapid rate of change in the next two years.

The Transforming Role of the GAO

CPAJ: What are your primary goals for the GAO?
Walker: First, to make the GAO the model federal agency and a world-class professional services organization for public, private, and not-for-profit entities. A lot of the changes that the GAO is making are state-of-the-art, even for the private sector.

Second, to help change the way the government does business, including how success is defined and measured. Within the GAO, we have emphasized employee feedback, client feedback, and results. In our June 2002 employee survey, 89% of our employees responded to a voluntary, anonymous, online survey to assess employees’ perceptions of the agency, the leadership, and our priorities. The overall positive responses increased while the negative responses decreased this year on 50 of the 52 questions. Similarly, we have instituted more client feedback mechanisms when someone from the GAO testifies before Congress, when we issue a report on a “high-risk” topic, or when a report requires a significant amount of GAO resources. We incorporate these measures into our institutional performance metrics and our individual performance measurement and reward systems.

We have tried to build more constructive working relationships with those we audit by not just pointing out what is wrong, but also by acknowledging what is right. We share best practices, develop methodologies, and publish benchmarking tools to help them make progress. The feedback is overwhelmingly positive. Last year we generated $37.7 billion of financial benefits for the American people with approximately a $432 million budget—a return of about 87 to 1 for fiscal year 2002. In 1998, that benefit-to-cost ratio was about 58 to 1. Our continued improvement in results is attributable to our great people, our increased leveraging of technology, and our continued focus on risk and value-oriented targeting and process improvement. I plan to continue to take steps to make sure that
comprehensive civil service reform becomes a reality during my term. I also plan to work with Congress and other stakeholders to address other areas requiring legislation, like sourcing strategy, postal reform, and the transformation of the Department of Defense (DOD).

The third major goal is to help reconcile the huge gap between projected revenues and projected expenditures in our long-range budget situation for the federal government. We are trying to stimulate discussion and more timely action in dealing with those challenges than is likely under the ordinary political process. In government, many people tend to focus on the present, because of the shortness of political terms. They are naturally looking out for their state, district, or program. The major challenges to the country tend to be long-term issues that cut across narrowly defined silos. The GAO, as an institution, and I, as Comptroller General, have the opportunity to look long-range and more broadly.

CPAJ: To what extent is the GAO insulated from the Congressional political forces and politically sensitive issues, such as Social Security and Medicare?
Walker: Some of our work deals with the “operations” of government, and other work deals with “policy.” We are very aggressive in making recommendations about government operations. On the policy side, we get the facts, provide objective analysis, identify options, discuss pros and cons, and we may even recommend a framework for decision making, but we do not make specific policy recommendations. Those are political decisions for elected officials and we do not cross that line.

CPAJ: How do you make decisions in such a complex and sensitive environment?
Walker: I am a strong believer in core values, both professionally and personally. These values represent a combination of beliefs and boundaries. In addition to having professional standards, it is essential to have a small set of core values to articulate the organization’s culture internally and externally, as well as personally. Decisions can be made more quickly and confidently with such values. The GAO has three core values: accountability, integrity, and reliability. Accountability describes the work we do. Integrity is how we do our work. Reliability is how we want our work to be received. Those core values are ingrained in our staff, they are conveyed to our clients and others outside the GAO, and they help me make decisions daily.

CPAJ: What are the biggest challenges of your job?
Walker: One of the biggest challenges of my job is our clients. By definition, we have 535 clients (100 senators and 435 representatives). They all belong to a political party, they represent different geographical areas, they all are self-confident and fairly opinionated, and sometimes they believe they have the answer to the issues they want us to study before we have done our work. So we have to remember that we work for Congress and, thereby, for the American people. We have to remain committed to our professional standards and core values.

Tackling Difficult Issues

CPAJ: To what extent is the GAO obligated to take on projects at the behest of U.S. representatives or senators, and how much flexibility does the GAO have to initiate discretionary projects?
Walker: Approximately 85% of the work we do is either the result of congressional mandates or requests by congressional committees or members of Congress. By law, we must do all work within our authority that is mandated by Congress or requested by congressional committees. We generally try to do additional work that is requested by members of Congress, as long as it is meaningful, passes a cost-benefit test, and is within our statutory authority and professional competence. The remaining work is discretionary.

The amount of work that is requested of the GAO has changed dramatically over the years. For example, in 1966, more than two-thirds of the GAO’s work was done on its own initiative. By the time I was appointed in 1998, only 4% of the work done was on the GAO’s initiative. I wanted to get that discretionary work to about 15% and we have done that since I became Comptroller General. As I mentioned, Congress is understandably focused on relatively short-term matters and there is a need to focus on some longer-range issues before they become crises. We need to have some flexibility to select projects. If we choose a worthwhile subject, we really only have to take the initiative to do work in that area the first time, and after that there will be others that request the follow-up work.

CPAJ: How would you characterize the issues associated with the lawsuit against Vice President Cheney that was dismissed in December 2002?
Walker: The Vice President is a man of principle, and so am I. When there is a disagreement between the executive and legislative branches, the judicial branch may have to resolve it, though I don’t think it is generally a good thing for one part of government to sue another part. In fact, this is the first time in the history of the GAO that we have filed suit against another federal official. However, I believe very strongly that this was something we had to do under the circumstances. This case involved the important concepts of transparency and accountability of government, which are vital for a healthy democracy. I had to do what I believed was right, regardless of who the President and Vice President are.

All we requested in this case was who met with whom, when, about what, and what it cost. We focused exclusively on external parties. We merely asked what subject matters were discussed, not for recommendations that were made. We did not ask to see notes, minutes, or deliberations. What we asked for was reasoned and reasonable for Congress to have in the area of energy policy, which is of critical importance to the nation. We do not believe that this request intruded on any constitutional separation of powers.

The President did not formally claim executive privilege to preclude going to court, despite the intimations to the contrary. The White House even acknowledged that we have a right to the cost information that we have requested, but they have refused to provide all of it. I suppose they fear that future comptroller generals might request additional information that goes far beyond what we are currently seeking. Oral arguments were presented in District Court on September 27 and a decision was made in December. We were very disappointed with the judge’s decision. We are in the process of reviewing and analyzing the decision to fully understand the basis for it and its potential implications. We will consider whether or not to appeal after we have completed this review and consulted with Congressional leadership on a bipartisan basis.

CPAJ: Would you comment on the status of the GAO’s investigations into the accounting profession following a string of corporate frauds and failures and the subsequent indictment and collapse of Andersen? How has the Sarbanes-Oxley Act affected the GAO?
Walker: As a former Andersen partner, I have recused myself from any investigation of Andersen because of the “appearance” issue. What happened to Andersen is tragic. There are a lot of lessons to be learned. While there may be some issues unique to Andersen, including the role of the practice directors and the authority of individual partners, I believe that there are some systemic issues, especially related to independence and the scope of services, that are not limited to Andersen. Ultimately, those issues have to be addressed.

We were asked to do several projects related to the Sarbanes-Oxley Act. One was to evaluate the role of the investment banks and other financial professionals in connection with the collapse of Enron and WorldCom. Because there are criminal investigations under way, we are trying to work with the Senate to determine what role makes sense for us. We have also been asked to evaluate the market implications of going from the “Big Eight” to the “Big Four,” as well as the implications of having mandatory audit firm rotations. The Sarbanes-Oxley Act requires rotation of audit partners for public companies every five years, instead of seven, and it contains a five-year limit per partner. In summary, there is no question that we will be doing a lot of work with regard to the activities of the new oversight board and the SEC. Congress has been turning to us for answers in these areas with increasing frequency.

CPAJ: Is Congress likely to revisit the Private Securities Litigation Reform Act of 1995, perhaps replacing proportionate liability with joint-and-several liability?
Walker: I’ve heard some of those rumors, but I don’t sense much momentum for that at the present time. I suppose that proportionate liability could be reconsidered at some point, but the general feeling seems to be that it would be premature to do that at this time. I expect that these issues will be studied, and, if changes in the securities laws were seriously considered, then formal hearings would have to be held. But Congress has a number of other urgent matters on its plate, so this issue is not likely to be a high priority in the new term.

CPAJ: What prompted the GAO to revise its independence standard, an action the AICPA publicly opposed?
Walker: I think it is generally desirable for the profession to regulate itself and to allow markets to function, but that is not always possible or appropriate. There has been increasing tension between the desire to grow the business with nonaudit services and the challenges associated with protecting the public interest through the attest function for the same client. I don’t think it is realistic to expect the profession to regulate itself on certain kinds of issues. There are some fundamental conflicts. There is too much rationalization as to why nonaudit services benefit the client or are not really a problem. As a result, the GAO began working on a revision of our independence standard for the Yellow Book for audits under Governmental Auditing Standards.

Originally, the GAO was not going to take on the scope-of-service issue, but that was unacceptable, in my view. I take responsibility for addressing that issue. When professionals violate independence, either in fact or in appearance, they hurt the profession. I believe the issue needs to be addressed in a principled manner. At the same time, I do not think it is appropriate to say that CPAs can’t provide consulting services to their audit clients; nor do I think it appropriate to specify arbitrary percentages or ratios involving consulting and auditing fees as bright-line indicators of independence violations. Clearly, CPA firms can provide a huge range of consulting services to their nonaudit clients. In some cases, though, I believe a firm must make a choice between providing audit or nonaudit services to a particular client. We took a lot of heat over this issue initially, but we are getting a lot of accolades now. I believe that our principles-based approach will withstand the test of time. I hope that the AICPA, the SEC, and the new Public Company Accounting Oversight Board [PCAOB] will embrace our framework so that we might all move toward adopting one set of independence standards.

Naturally, the AICPA represents its membership. It was particularly concerned about the impact of our new independence standard on smaller firms. The Yellow Book standards do affect a lot of entities of varying size and sophistication, so the AICPA had some legitimate concerns. Our “due process” allowed a wide variety of parties, including the AICPA, to have input into our new independence standard. In my view, some of their early positions were not entirely reasonable, but we have a constructive relationship. We are trying to work with the profession, through speeches, publications, training, and other activities, so that CPAs and their clients understand the new standard and can comply with it.

CPAJ: What are other significant proposed changes in the revised Yellow Book?
Walker: First, we are taking steps to define the types of audits and services that can be done under the Yellow Book. Second, we are working to ensure that the basic fieldwork under the Yellow Book is consistent, regardless of the type of audit conducted. Third, we are taking various steps to strengthen, streamline, and clarify the standards, as appropriate.

CPAJ: Congress enacted the Chief Financial Officers Act in 1990 and the Federal Financial Management Act of 1994, which mandated that federal agencies produce audited financial statements. How would you describe the progress made to this point and the work that remains?
Walker: Of the 24 major departments and agencies comprising the federal government, 18 achieved unqualified opinions on their fiscal 2001 financial statements. However, in my view, one should not measure success in financial management solely by the issuance of an unqualified audit opinion on the financial statements. In some cases, the departments and agencies achieved those unqualified opinions by spending millions of dollars and thousands of hours over several months after the year-end in order to reconstruct the financial records. The Joint Financial Management Improvement Program defines financial management success in terms of an unqualified opinion on the financial statements, no material weaknesses of internal control, no significant compliance issues, and systems that provide timely, accurate, useful information to management decisionmakers on a day-to-day basis. Under this new definition of success, only the National Science Foundation, one of the largest departments and agencies, is deemed to be successful. Personally, I think it is far better to focus on substance rather than form. In addition, we have agreed to significantly accelerate the reporting date for agencies and for government-wide financial statements. In the past, the agencies’ audited financial statements [as of September 30] were not required until February 28, but this deadline will be advanced to November 15, effective in two years. That will preclude agencies from using extreme efforts to achieve the kind of audit opinion they want. With a November deadline, government entities will have to have effective controls and systems in place to receive an unqualified opinion.

The DOD is probably the biggest single obstacle to our issuance of an opinion on the consolidated financial statements of the federal government. When it was created in 1947, DOD was the largest reorganization in the history of our government. While our military has no peer in the world and is clearly an “A” in terms of effectiveness, DOD is just as clearly a “D” in terms of economy, efficiency, and accountability. We are trying to work constructively with the department under the leadership of Secretary Rumsfeld and with the Congress to accelerate the transformation process. I am glad to have 11 years left in my term, because implementing adequate financial management systems and transforming DOD may take every day of the balance of my term.

CPAJ: In closing, is there anything else that you might wish to say to readers of The CPA Journal?
Walker: Recent events have presented a number of significant challenges to our economy, the business community, and our profession. At the same time, they represent substantial opportunities. CPAs have an opportunity to modernize the accounting and reporting model, as well as attest and assurance approaches, for the 21st century. We also have an opportunity to create a strategic alignment between attest and assurance professionals and the appropriate oversight bodies where there should be a mutuality of interests in managing risks and holding management accountable. If we seize the day and address the systemic problems that exist, we can make the profession more important, more valuable, more respected, and more effective than it has ever been. That will take a level of leadership and sustained commitment over time that, in my view, has yet to emerge.

The GAO, as an institution, and myself, as Comptroller General, will try very hard to facilitate positive and needed changes. We have already held a forum involving leaders from both the public and private sectors dealing with challenges in corporate governance, transparency, and accountability. We have held another conference dealing with progress that has been made and issues that still need to be addressed. We have to learn from the past and prepare for the future, and it is time to get on with it.

Donald E. Tidrick, PhD, CMA, CIA, CPA, is associate professor of accountancy at Northern Illinois University.