Let's take a look at a broad vision of the future so we can set a general direction. After setting a general direction, we will look at the GAO's specific perspectives on more immediate audit issues.

Ideas to Shape the Future

These are some of the ideas that will shape the future of all auditors.

* From the AICPA Special Committee on Financial Reporting:

"Essential non-financial information should be integrated with the financial statements--such things as the entity's objectives, its production data, and non-financial statistics. Forward-looking information and information about operating opportunities and risks should also be presented."

* From the Public Oversight Board in its report In The Public Interest comes a recommendation for the FASB to study the possibility of replacing accounting on the basis of historical transaction prices with fair values.

* From a recent audit/assurance conference--a conference that included academia, regulatory and oversight bodies, as well as professional auditors--comes a suggestion to redefine the audit assurance function. They said:

"In the future, an auditor's report should be about the reliability and/or relevance of the entity's information or its information processes."

What a change in responsibility! As a result, auditors would provide assurance about information, not just accounting data, and about real- time events, not just historic events.

* From futurist Bob Elliott, one of the auditing profession's own:

"Information technology has changed everything. We are now in the third wave of history--that of information technology. Long gone is the industrial era and the agricultural era before it. "Because information technology changes business and management fundamentals, it must also change accounting and auditing." His examples: Today's exchange criteria for accounting recognition of events have become outmoded. Triple entry accounting is needed to measure the rate of change. Intangible assets have replaced hard assets as the focus of accounting.

* From Thomas Davenport of business reinvention and process redesign fame comes this little gem:

"In today's demanding environment, simply formulating strategy or setting new policy is no longer sufficient." Hear that agency heads! "With today's budget restraints, it is essential to redesign processes in order to make any really effective change."

* And finally, much closer to home, Phil Lader, in a recent talk, stressed ideas like these:

* The government must adopt businesslike disciplines.

* We must have electronic government.

* We must seek cross-servicing opportunities.

Auditors and accountants--

* streamline your reports and make them understandable;

* integrate quantitative data with performance measures; and

* get qualified people into your shops and build your professional knowledge.

Government Response

Some parts of the Federal government are actually waking up to the future--trying to catch up with America's best practices--and in a few cases, going beyond.

I don't know how many of you have seen the government-wide balance sheet that appears in the President's budget. It is astounding and an outstanding first step toward providing a real accounting to the American public.

The balance sheet attempts to measure the Federal influence on the economy. It includes a statement of Federal assets and liabilities which uses an options-pricing method to value the future costs of government guarantees and insurance. That statement of Federal assets and liabilities is then overlaid by statements of national assets and needs. National assets of $51 trillion reflect other difficult-to-value things like the $800 billion Federal portion of the nation's $26 trillion of educational capital. Importantly, GAO and the Inspectors General will have to audit this balance sheet or something like it in the next two or three years.

Many of these new ideas I have mentioned will take hold. We can see it beginning to happen.

There is a growing body of management-related legislation--the CFO Act has now been followed by the Government Performance and Results Act (GPRA), and, hopefully soon, by expansion of CFO Act coverage (H.R. 3400) and then by a Chief Information Officer Act. National Performance and Results (NPR) initiatives--many of them--seek to obliterate our old ways. The information superhighway is already flourishing; many of us are on the Interact now. There are new initiatives at the state level as well. Things that are now on the table will change our basic cultures and deeply affect the way government is managed. All of these initiatives must and inevitably will be integrated into a management system that will need to be audited. They will affect your jobs. Auditing, as we know it today, will change totally. The accounting information spectrum will broaden; it will merge into information systems and technology, and then flow into real time auditing and comprehensive management reporting. A management report is the document that users will eventually want audited.

Auditors who resist the future or wait for something to happen for them will be out of a job or relegated to clerk roles.

GAO Response

The GAO is changing in response to our vision of the future. We know that we no longer determine our product. The customer is king in this total-quality-management age. We have recently merged our Accounting and Financial Management Division and our Information Management Technology Division. This new multi-skilled unit is building close affiliations with our program divisions and seeking to build on our management competence so we can handle merging financial data, new information systems and process redesign, and program results. We have forward- looking training and personnel development plans to prepare our people for the future. For example, we are planning for specialist tracks; we will have our own experts in process re-engineering. Specialists of various kinds in the GAO will need to work together to do the audit assurance work of the future. We think we will be players as the future unfolds. We think we see the general shape of the future, and we are preparing ourselves for it.

Steps Toward the Future

So now that we all have glimpsed the more distant future, let's come back to our more familiar government auditing neighborhood and steer a near-term course that makes sense in our neighborhood. Let's talk about some audit issues in the more immediate future.

Do Opinion-Level Work on Internal Controls. I submit no one can do an effective audit of a large Federal agency and meet today's user requirements, much less tomorrow's, without doing opinion-level work on internal controls--including controls over safeguarding assets and controls to insure compliance with laws and regulations. The GAO does its audits that way now, and I predict that OMB will soon mandate that approach for all CFO Act audits. The Single Audit Act will be revised that way and even the Yellow Book--not in this revision, but the next one--I venture to predict, will call for management reports on internal control with auditor attestation.

Work With Private-Sector CPAs to Further the Public Interest. There aren't enough government auditors now to do the job that needs to be done. There will be fewer of us Federal auditors as NPR downsizing occurs. Downsizing has already taken place at the state level. Government auditors and private-sector CPAs need to work more closely and smarter. For the public good and in various ways, public auditors should be working with private CPAs to build the CPAs into a more efficient and effective audit function that serves the government's interests. For example, there is no effective audit protection for government funds placed in the hands of Energy Department contractors, health care intermediaries, and a multitude of other private sector companies who now serve as extensions of the Federal government. Even the Department of Defense, which had an audit function for contractors, will be less protected as its army of DCAA auditors shrinks. Our government is losing untold amounts through the waste, fraud, and inefficiency of its contractors. Federal government auditors, through their own individual efforts, can't stop it. We now have no Single Audit Act equivalent to cover Federal government contractors.

But we have some precedent. GAO work convinced Congress to enlist private-sector CPAs to help protect the Bank Insurance Fund by requiring examinations of bank internal controls and compliance for the benefit of the government and by mandating close working relationships with government bank examiners. This may be a model for the future. But other countries have gone even further and turned their government's entire bank examination function over to the bank's private sector auditors. Following that lead, why not make the U.S. government a party to CPA audit contracts with Medicare intermediaries and other government contractors where large amounts of government funds are at stake? Although legislation may be required to facilitate that process, government auditors should promote this type of solution for a problem they can't handle with their own resources.

EXHIBIT

GOVERNMENTASSETS&LIABILITIES

ASSETS(inbillions)(*)

FinancialAssets:

Goldandforeignexchange$171

Othermonetaryassets37

Mortgageandotherloans219

Lessexpectedloanlosses(58)

Otherfinancialassets190

Subtotal$559

Physicalassets:

Fixedreproduciblecapital:

Defense$747

Nondefense240

Inventories163

Nonreproduciblecapital

Land222

Mineralrights370

Subtotal1,742

Totalassets$2,301

LIABILITIES

Financialliabilities:

Currencyandbankreserves$385

Debtheldbythepublic2922

Miscellaneous68

Subtotal3375

Insuranceliabilities:

Depositinsurance53

Pensionbenefitguarantees75

Loanguarantees27

Otherinsurance23

Subtotal178

Federalemployeepensionliabilities1577

Totalliabilities5130

Balance(Deficiencyofassets)$(2,829)

Percapita(in1993dollars)$(10,925)

*exceptforpercapita

Make Financial Audits More Useful. Auditors must do more than just fix the books and identify the symptoms of internal control problems. Many private-sector CPAs and some government auditors need to change their audit approach so that they assess the operational impact of errors and problems they find. These auditors need to look for real root causes and make constructive recommendations for improvement.

Let's take that point a little slower. First, auditors need to say to themselves when they find an error or a symptom, "so what does that mean?" "How might it affect operations?" Second, they then need to do enough additional work and diagnostic thinking to identify the root causes. And third, they need to put themselves in the auditees' shoes and try to suggest what that person should do to fix his or her problem in a cost-effective fashion. The GAO takes that approach. As a result, GAO audits increasingly are helping agencies to improve operational efficiency and effectiveness, make savings through increased collections and decreased spending, reduce the impact of future costs and problems through early warning, and identify other important risks and uncertainties that may affect the future. This kind of auditing takes more time, but provides a much better investment return on audit cost. Unless we do our work this way, audits will become a cheap, unvalued commodity purchased only when required by law. CPAs need to contract for government audits they do so they can work this way. Inspectors General can help make CPA Federal audits effective by structuring audit contracts this way. When Inspectors General do the actual work, they need to make the necessary investment of their own resources to work this way. Only if they do, will they overcome NPR's criticism of Inspectors General negativism and lack of helpfulness.

Audit Cost Information and Understand Process Design. Cost data is perhaps the single most missing ingredient in the Federal government's accounting stew. We have virtually no cost systems across the Federal government. But good cost information is needed by budgeteers and is required for GPRA to be operative. It is demanded by NPR, In my opinion, FASAB will not survive unless my colleagues and I can deliver standards to determine the full costs of government products and services on something approaching a current value basis. Because cost information is so integral to improving the management of government, auditors will be asked to audit it. To do that, auditors will need to have professional- level understanding of activity-based costing. Why? Because that is the predominate method that is going to be used to determine costs. Auditors will also have to know more than a bit about process redesign and its relationship to efficient delivery of government goods and services. Why? Because that is how costs are going to be reduced.

You will be charged with determining the real cost of government outputs and how those costs might be reduced. To succeed then, you can't only be balance sheet financial auditors. You must be cost analyst operational auditors working with modern tools to be players in performance measurement. At the GAO, we hope to be able to go even further--beyond measurements related to outputs by working with our program divisions who are taking the lead in trying to help identify meaningful and measurable outcomes for government programs. But, I will be frank with you. The GAO is only just starting to deal with the cost and performance measurement part of our future. We, and you, need to step quickly to get ready.

Provide Assurances on Information Systems. Government managers need good accounting information every day, not just at the end of the year after a protracted audit of old data and lots of audit adjustments. The GAO is working now to take the broad systems guidance now being provided by the Joint Financial Management Improvement Program (JFMIP) in its core documents down to an operational level. We feel we need to spell out, in sufficient detail for a systems designer, the requirements for accounting systems and the linkages with other information systems. We need to do that to have a foundation for improved systems audits that will tell the agencies whether their systems are providing accurate information that is sufficient and relevant to their needs on a day-to- day basis. When we find a problem, we will then be able to tell the agencies how to fix the systems' parts of the problem and be in a better position to identify other parts of the problem. This is the GAO's first step toward real-time auditing, and we hope it will become an increasingly common role for government auditors. As always, our methodologies will be made available to others after we have fully tested them and are satisfied they work.

Welcome a Broad Definition of the Assurance Function and Take Advantage of that Opportunity. In Federal audits, the value of auditors' work will be judged most critically by those who read the agency management report used for Congressional oversight. I predict there will be one such report for each agency and it will be used as the basis for extensive biennial oversight of each agency by its cognizant committees. Agency heads, as well as the Congress, will know what the Inspectors General role in it has been. It is in this report, I think, that all the auditing work of the future I have been talking about and some other work I have not been able to cover here--like the Federal Managers' Financial Integrity Act (FMFIA) report-- will be brought together and a judgment made about its value. I think OMB guidance for agency reports will push laggards hard and will move fast to establish new requirements for auditors.

We Need to Move Carefully

I've given you my views. Of course, no one knows exactly how the future is going to turn out. Things surely will be somewhat different, and obviously there will be difficulties to overcome. We need to take each of our steps toward the future carefully and be prepared to shift direction and fine tune.