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ON-THE-SITE AUDIT

In the development of the new accounting system of the Coast Guard, emphasis is being placed on the application of accepted principles and practices for internal control and internal audit. In this connection, it is intended that in addition to the features of internal control that are being built into the system a staff of competent accountants will be employed by the Coast Guard to make periodic internal audits. This is consistent with the policy of our program with respect to the concept of the responsibilities of operating agencies. Also, I believe it affords an excellent opportunity for developing the full potentialities of external audit which will give recognition to the effectiveness of internal control and internal audit in actual operation.

Of particular interest to me is the fact that if it is possible for you to extend this approach to audit to the Coast Guard, savings will result in terms of personnel required to carry on the Coast Guard's accounting operations. This is tied up with decentralization of the accounting system to the maximum extent possible to the various Coast Guard districts and independent offices in order to obtain more current and accurate cost data for day-to-day use in the management of the Coast Guard's operations. It is anticipated that additional cost resulting from the decentralization will be offset, at least in part, by a reduction in headquarters accounting personnel. However, unless on-the-site audit is instituted the savings now contemplated cannot be fully realized. If the Coast Guard must continue internal work geared to present audit methods, it may be necessary to forego certain fundamental improvements in its system due to the tight budget situation.

In addition to the foregoing considerations, I am convinced that a comprehensive on-the-site audit can provide information which will be an effective aid both to management in the Coast Guard and to the Secretary of the Treasury in connection with his administrative responsibilities. I also believe that where there is an efficient accounting system in operation with adequate internal audit and controls, an audit on the site which appropriately takes these factors into consideration will result in a more effective and economical independent audit.

An on-the-site audit is now being made of military pay records at Coast Guard headquarters. However, for purposes of economy and to provide better internal control the new system contemplates that pay records will be retained in field offices until they have been audited in accordance with procedures similar to those now in effect for civilian pay under General Regulations No. 102. This would necessitate discontinuance of the audit of such records at headquarters in Washington.

In requesting on-the-site audit for the Coast Guard I am aware of the fact that in carrying out your audit responsibilities there are practical considerations with which you must deal in deciding on the time and places for the adoption of this type of audit. Nevertheless, for the reasons I have previously mentioned, I am hopeful that you will be able to give favorable consideration to the institution of an onthe-site audit for the Coast Guard at this time. In this connection I should like to point out that this would not immediately require a complete change-over in audit methods since the installation of the new accounting system is scheduled to be made at various times in field offices over a period of 12 months and on-the-site audits would be instituted only as the new system is installed at each particular location.

DEPOSIT OF COLLECTIONS DIRECTLY WITH DEPOSITARIES Closely related to the application of on-the-site audit methods is the simplification of collection procedures. In the case of the Coast Guard it is proposed to eliminate the preparation of schedules of collections and the processing of collections through the accounts of the disbursing officers. Instead, designated officers of the Coast Guard would prepare certificates of deposit and would make deposits of all collections directly with designated depositaries. This will result in improved control over collections, provide a better basis for audit, and effect economies through the simplification and elimination of certain paper work. The procedure contemplated is similar to that recently adopted for use in the United States Maritime Commission.

SIMPLIFICATION OF DISBURSEMENT CONTROL PROCEDURES One of the projects under our joint program relates to the simplification of disbursement control through a revision of related warrant procedures. This involves: (1) Recognition that primary responsibility for control of expenditures under each appropriation rests with the administrative agencies; (2) review of the effectiveness of current accounting and adequacy of internal controls in each administrative agency; and (3) central accounting and reporting by the Treasury Department of disbursements made according to each appropriation. I understand that our respective staffs have been working on this project, that general agreement has been reached with respect to principles, and that the main concern at present is the extent to which desired objectives can be attained under existing law.

The Coast Guard has been anxious to simplify disbursement control procedures by eliminating requisitions and accountable warrants under each separate appropriation. With this in view the Coast Guard, about 6 months ago, proposed legislation which would permit the use of an account of advances similar to that of the State Department. The proposal was discussed by the Coast Guard with the Bureau of Accounts of the Fiscal Service and the Accounting Systems Division of your Office. The desirability of simplifying the disbursing procedures of the Coast Guard was not questioned. In view, however, of developmental work in this field which was going on at that time under the joint program, it was agreed that special legislation for the Coast Guard should not be requested pending the outcome of such work. The plan which has been developed was the subject of further conferences between representatives of the Accounting Systems Division of your Office, the Fiscal Service, and the Coast Guard, and it is the opinion of this Department that if effected it will accomplish desired objectives under the authority of existing law. In principle the plan is as follows:

(1) An appropriate warrant would be designed which would authorize the Treasurer of the United States to pay checks drawn by authorized disbursing officers of the Division of Disbursement against the total amount of appropriations or funds available for use of the Coast Guard.

(2) Assistant disbursing officers of the Division of Disbursement, making payments on behalf of the United States Coast Guard, will be accountable for all checks drawn by them on behalf of the chief disbursing officer, and they will discharge their accountability by producing vouchers properly drawn in accordance with the Certifying Officers' Act of December 29, 1941, as amended (31 U. S. C. 82c).

(3) Primary responsibility for controlling expenditures within the amounts of available appropriations and funds would be that of duly designated accounting officers of the Coast Guard who, for this purpose, would be designated as certifying officers.

(4) Central accounting for disbursements made under each appropriation would be maintained in the Division of Bookkeeping and Warrants, Treasury Department, on the basis of confirmed teletype reports, through that Division's appropriation accounts. These accounts would serve not only as a basis for the audit by the General Accounting Office but would also be the basis for current classification of expenditures to be reported in the Daily Treasury Statement, the annual Combined Statement of Receipts and Expenditures, and the Budget Document.

I believe that the Coast Guard with its present accounting program is an ideal place to work out the procedures necessary to put this plan of simplified disbursing control into effect. On the other hand, I would not advocate the installation of such procedures with regard to any administrative agency or subdivision thereof unless it is fully equipped with a satisfactory accounting organization and system to carry out primary responsibility for controlling its expenditures in accordance with the principles of the plan. Moreover, I think that another important factor involved in the extension of this plan to other agencies is the type of independent audit that will be applied to such agencies and the review of the effectiveness of the procedures in actual operation both in the Treasury Department and the other agencies concerned.

The principles of the three proposals set forth in this letter appeal to me not only because they are in the direction of realizing objectives and policies of our joint program but also because they offer an opportunity for real economy in the accounting, reporting, and auditing activities of the Government. Very truly yours,

John W. SNYDER, Secretary of the Treasury.

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington 25, D. C., September 29, 1949. The honorable the SECRETARY OF THE TREASURY.

MY DEAR MR. SECRETARY: I have reviewed and considered with a great deal of interest your letter of August 30, 1949, containing three proposals in connection with the further development and installation of the accounting system of the Coast Guard. I appreciate very much the spirit of cooperation in connection with our joint efforts to improve accounting in the Government which prompted your submission of these proposals. It is indicative of the wholehearted cooperation which the General Accounting Office has received from the Treasury Department since the inception of our program.

I agree with you that there is much to be gained from the standpoint of the future development of our program by linking the testing and development of revised procedures along the lines of your proposals with the good work which is being done in the Coast Guard in connection with its accounting system. I have, as you know, long felt that the improvement and simplification of the accounting and auditing processes for the Government as a whole is, in large measure, dependent on the extent to which there is an active force for the development and maintenance of adequate systems of accounting, internal control, and internal audit within each agency. I have been informed of the manner in which the Coast Guard has organized and staffed to develop its accounting and related procedures from the standpoint of management needs. I have been particularly interested in the plans which have been developed for utilizing the accrual basis of accounting for linking budgetary accounting with modern accounting methods dealing with the development of costs and expenses. The constructive work which is being done should provide a good basis, in terms of effective internal procedures, to test out in actual application simplified accounting and audit procedures.

The specific elements of your proposals are dealt with below:

SITE AUDIT

Site audit, on a comprehensive basis, involving appropriate utilization and evaluation of the effectiveness of internal procedures, will be provided for the Coast Guard. Conversion from present audit methods will be synchronized with the installation of the new accounting system and related internal control and internal audit procedures. The development and application of the revised external audit procedures will be the responsibility of the Chief of the Audit Division, who will, of course, work closely with the Chief of the Accounting Systems Division in effecting necessary coordination between the accounting and audit phases of the problem.

The extension of site audit to the Coast Guard is in line with my general policy of increasing the scope of the audit through application of this approach where it is determined to be in the best interests of the Government to do so, all factors considered. I regard the work being done in the Coast Guard as an opportunity to further develop in practical and specific terms the full potentialities of a comprehensive audit which will embrace, an audit of the books, records, and procedures on a coordinated basis with appropriate examination of expenditure transactions. Our plans contemplate the rendition of periodic audit reports. Disallowance of any illegal expenditures disclosed as a result of any phase of the audit work will, of course, be continued on a current basis.

The audit work to be done on this basis in the Coast Guard will provide valuable factual data in connection with the development of future plans on the part of my Office with respect to modification of audit methods in relation to accounting systems and management improvement in the various agencies. I am looking forward with great interest to evaluating the results accomplished.

DEPOSITS OF COLLECTIONS DIRECTLY WITH DEPOSITARIES I am in agreement with the installation of the proposed revised collection procedures in the Coast Guard so as to provide for direct deposits with designated depositaries, with corresponding elimination of present intermediate processes, including the preparation of schedules of collection. It will, of course, be necessary for the installation of these procedures to be closely coordinated with the installation of appropriate accounting and internal control procedures and with the conversion to site audit.

SIMPLIFICATION OF DISBURSEMENT-CONTROL PROCEDURES

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I am in full accord with your proposal to establish for the Coast Guard disbursement-control procedures on a more simplified basis to the fullest extent possible under existing law. As one of the announced objectives of our program, this matter of simplifying present disbursement controls and related warrant procedures for the Government generally has been under consideration by our respective staffs for some time.

I know you appreciate as well as I do that our program for these purposes must proceed with due regard for the requirements of sections 76, 77, 78, and 498 of title 31 of the United States Code. Under these existing statutory requirements there would have to be preserved a warrant and requisition in the process of making funds available to a disbursing officer, by appropriations and the accountability of the disbursing officer for such funds, and the disbursing officer could not legally issue checks in an amount exceeding the amount advanced to him under each appropriation. But. I do not regard these statutory requirements as a bar to simplification and even consolidation of warrant and requisition forms which will preserve the necessary elements of such requirements. Nor do I regard them as preventing the disbursing officer, in the discharge of his own responsibilities, from giving due regard to the internal control exercised to keep approved expenditures within the limits of advances made to him by appropriations. Also I see no legal objection to the making of arrangements for the requisitioning of all funds under a given appropriation at one time.

I am in agreement that, under existing provisions of law, revised procedures can be worked out in accordance with the following principles and substantially in accord with your suggestions:

1. By warrant action the Treasurer of the United States may be authorized to pay checks drawn by authorized disbursing officers against the total amount of appropriations and funds available for use by the Coast Guard. There appears to be no reason why, as you suggest, such action cannot be incorporated in one warrant for the entire amount of all appropriations involved. If this is done, such composite warrant must embody required elements of (a) the appropriation warrant, (6) requisition for disbursing funds by individual appropriations, and (c) an advance of funds to the Chief Disbursing Officer by individual appropriations.

2. Accounting by assistant disbursing officers making payments for the Coast Guard will be on the basis of checks issued and paid vouchers classified by appropriations, as distinguished from the establishment of separate subsidiary disbursing balances for each assistant disbursing officer by individual appropriations. All disbursements made will, however, be considered as being made against the aggregate amount advanced to the Chief Disbursing Officer under each appropriation.

3. The administrative accounts and procedures of the Coast Guard will be the primary point of control for keeping disbursements within the limits of appropriations. Consistent with this, responsible accounting officials of the Coast Guard will, for this purpose, be designated as certifying officers. While, as previously stated, this cannot, under existing law, change the legal status of advances to the Chief Disbursing Officer, nor affect his accountability therefor, it is consistent with the basic objectives of the plan and a progressive step in that it places responsibility for certifying as to the availability of appropriations for disbursements to be made with officials who have responsibility for maintaining the internal controls for such purpose.

4. Provision will be made for maintaining in the Division of Bookkeeping and Warrants central accounting for disbursements made under each appropriation on the basis of reports originating with assistant disbursing officers classifving disbursements by appropriation. It is also my understanding that the procedures to be applied will provide for current reconciliation by appropriations with related accounts of the Coast Guard. This will provide a basis which the Chief Disbursing Officer may use to assist him in making the required accounting for all disbursements made under advances to the Chief Disbursing Officer according to the individual appropriations involved.

I think we are fortunate in having in the Coast Guard at present such an inviting situation for its selection as a testing base for this pilot program. I hope we can move forward as quickly as possible over a sufficient period to permit an adequate evaluation of results. In the meantime I am sure you will agree that the application of all procedures covered by your proposals and agreed to herein, should not be considered as creating a precedent for the establishment of the same procedures in other agencies. And I agree with you fully that extension of procedures of this nature must depend upon determinations whether agencies are equipped with a satisfactory accounting organization and system to exercise the primary controls necessary. May I add that good management, generally, should also be present.

There will be matters to be worked out in specific terms in the development and application of detailed procedures involved in this Coast Guard program. Representatives of the General Accounting Office will be glad to work with the Office of the Fiscal Assistant Secretary and the Coast Guard in working out the necessary details. This work will be under the direction of the Chief, Accounting Systems Division, who will arrange for appropriate participation on the part of other divisions of the General Accounting Office.

Again let me express my appreciation for the interest and cooperation you have evidenced in furthering accomplishments of the joint accounting program. The proposals in your letter of August 30 are another example of your helpfulness. Sincerely yours,

LINDSAY C. WARREN, Comptroller General of the United States.

TREASURY DEPARTMENT,

Washington, November 4, 1949. Hon. FRANK PACE, Jr., Director of the Bureau of the Budget,

Washington, D. C. MY DEAR MR. PACE: Attached is a draft of a proposed addition to the appropriation language of the “Operating expenses” appropriation of the United States Coast Guard for fiscal year 1951. The wording of the proposed legislation, as well as the desirability and interpretation of it, has been the subject of informal joint discussions between representatives of the Treasury Department, the Bureau of the Budget, and the General Accounting Office. Statements regarding the desirability and interpretation of the proposed amendment are presented below.

You are aware of the accounting improvements which are under way in the Coast Guard. With the cooperation of the Comptroller General, several important innovations are being incorporated in the Coast Guard's accounting system on a trial basis. These are designed to simplify accounting operations while retaining essential controls and providing for improved accounting results for management of the Coast Guard's operations. A particularly important feature of the accounting system is the application of the accrual principle for development of costs incurred under the various programs of the Coast Guard. The proposed addition to the appropriation language will provide a basis for effectively utilizing such improved accounting data in the budgetary processes and integrating them with control of obligations incurred on an annual basis. I believe that this is of vital importance in making it possible to develop the performance budget concept in terms of actual cost and that there is much to be gained from moving forward on this basis in the Coast Guard at this time.

The revised appropriation structure for the Coast Guard as presently proposed consolidates the four appropriation accounts now provided for operating expenses into a single appropriation account and thereby provides the simplest possible appropriation structure on an annual basis. However, there is an inescapable overlap of applied costs from the unliquidated obligations of prior years into the applied cost of the current year. By using a single continuing account into which the annual appropriations for successive fiscal years will be placed, the cumbersome process of having to determine which items of applied cost are applicable to each of the three fiscal years' appropriations becomes unnecessary.

The proposed revision provides a means of merging fiscal-year appropriations into one account, and at the same time preserving the identity and integrity of each appropriation on a fiscal-year basis. Moreover, the proposal will result in lapsing unobligated balances of appropriations much sooner than is the case under existing legislation.

Independent verification of the validity of unliquidated obligations is provided through the institution of comprehensive on-the-site auditing of the Coast Guard's accounts and records by the Comptroller General. This change in external audit procedure provides additional justification for requesting the amendment to the appropriation language that is proposed.

It has been agreed by the joint group which has developed the proposed amendment that it should be interpreted in the following manner:

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