MAKING ACCOUNTING SERVE GOVERNMENT BETTER :
A CHALLENGE TO THE ACCOUNTING PROFESSION
Dr. Elmer B. Staats
Comptroller General of the United States
December 10, 1979
note: Elmer B. Staats is Comptroller General of the United States,
a position he has held since 1966. His professional career spans
more than a forty- year period including service with the U.S. Bureau
of the Budget, serving as Deputy Director from 1950-1953 and 1959-1966,
the National Security Council, as Executive Officer of the Operations
Coordinating Board, and the General Accounting Office, as Comptroller
General. He currently serves as a member of the board of trustees
of various institutes and universities and is a member of the selection
committee for the Rockefeller Public Service Awards.
Dr. Staats earned his undergraduate degree at
McPherson College, his masters degree in Political Science and Economics
from the University of Kansas, and he received his Ph.D. in Political
Science, Economics and Business Administration from the University
of Minnesota. As a Fellow at the Brookings Institute he pursued
research and an internship with the U.S. Social Security Board to
prepare his doctoral dissertation on "Personnel Standards in
the Social Security Program. His honorary degrees and awards include
Phi Beta Kappa, the Rockefeller Public Service Award, Doctor of
Laws from two universities, and the Person of the Year Award from
the Washington chapter of the Institute of Internal Auditors. ]
I am honored to have been invited to deliver a lecture sponsored
by one of America's leading schools of accounting and honoring one
of the profession's leading theoreticians and teachers -- Dean Emanuel
Today accountants and the accounting profession are challenged on
many fronts. If we do not develop solutions to what is widely perceived
as unmet needs, others will impose their solutions on the profession.
Illustrative of this concern was recent action by the Congress in
passage of the Foreign Corrupt Practices Act, imposing record-keeping
and internal control standards on Securities and Exchange Commission
registrants. Let me begin my remarks this evening by offering some
background on some of the current and emerging problems facing the
accounting profession -- at least as I perceive them.
As Comptroller General of the United States for nearly 14 years,
I have been responsible for establishing the accounting and financial
reporting principles and procedures for the Federal Government. My
term of office ends in early 1981. I've spent most of my professional
life in the Federal service; the Government's problems are what I
know best. It is on this basis that I share with you some of GAO's
accomplishments and some of its current projects.
The staff of the General Accounting Office, which I head, does all
it can to identify ways to improve Federal accounting and financial
reporting. We work hard at this because we are sure that the Government
can use its accounting systems more effectively and more efficiently.
Of course there are also other key problems -- especially the two
-- point challenge. Although my comments focus on the Federal Government,
the unresolved accounting and financial reporting issues I see at
the Federal level many apply also to government at State and local
levels and to private industry.
The two questions challenging professional accountants in the Federal
Government are as follows:
- How can accountants help managers use financial data in their
decision-making? Accountants must give managers estimates of the
financial consequences of alternative actions being considered in
any program. This would let managers select the most economical
use of public resources to achieve a program's goal.
- How can accountants help managers develop better internal control
procedures, using advanced computer technology, to detect misuse,
waste, and theft of public resources?
These, then, are two major challenges. Where did they originate?
How can we meet them?
Unabating inflation that generates continual rising costs and recent
revelations of the misuse, of Government and corporate resources have
focused attention on the need for better accounting and accountability
in both Government and industry.
Government at all levels is under pressure from taxpayers to hold
the line on costs and produce more at the same or lower cost. The
public's response to California's Proposition 13 and to similar propositions
on ballots in other States is that Government programs are needed
and should be continued, but that Government is inefficient or wasteful
and can and should accomplish program goals for less money and stop
These demands have been heard from Capitol Hill to the White House
and Federal managers are turning more and more to their accountants
and accounting systems for information and help in answering them.
We in the General Accounting Office are working closely with these
managers and accountants to improve agency accounting systems and
the financial information developed. This is the road to better managerial
decision-making and control of public funds and other resources and
assets. Government accountants, financial executives, and managers
also need the help and support of their colleagues in the private
sector. If we work together, the solutions we develop to solve the
Government's accounting and accountability problems may also help
solve similar problems facing many private profit and non-profit organizations.
At the start, the accounting profession should develop and implement
a research and development program. Such a program, particularly from
the Federal perspective, should include five steps:
First, the types of financial information and analyses accountants
and accounting systems give managers should be reevaluated. This should
focus on how historical financial information can be used prospectively;
that is, how historical financial information can be a basis for predicting
financial consequences of alternative actions.
Second, ways should be devised so that accountants and accounting
systems can take advantage of modern computer capability to enhance
controls over an organization's resources and increase the probability
of routinely disclosing fraud and abuse.
Third, an education program should be undertaken to break down negative
attitudes among managers, accountants, and computer professionals.
These attitudes currently preclude managers, accountants, and computer
professionals from collaborating as full-fledged members of an agency's
Fourth, reports sent to individuals outside a governmental or business
entity should be reevaluated to determine ways to make these reports
Fifth, a careful study should be made of the complex problems of
assigning dollar values to the Government's products and services
so these values can be compared with what they cost the Government
as a basis for deciding which programs to keep, which ones to abandon,
and which ones to start.
It is time likewise for Federal managers and accountants to study
how the accountant's role in industry has changed, and to learn from
industry how accountants can contribute effectively to improved management
of U.S. Government programs. In Federal agencies, accountants historically
have been viewed as financial scorekeepers with primarily a retrospective
view of events.
Now, however the computer and related advances in automated information
processing and analysis techniques give the accountant the opportunity
and the tools to actively participate in decision-making. Federal
accountants have the opportunity -- and the responsibility -- of showing
managers how to use historical financial information to help predict
financial consequences of alternative actions being considered.
Accountants can and should be able to help managers answer such basic
- Did we produce required products and/or services at the least
- If not, how can we change our operations to produce more for
each dollar spent?
Such questions can be answered by a host of analytical techniques
developed under the umbrella term of cost/benefit analysis. These
cost/benefit analysis techniques include:
- Analyses of cost trends.
- Comparisons of estimated versus actual costs.
- Comparisons of projected work units. tied to anticipated costs
and actual completed work units tied to actual costs.
- Comparisons of the costs incurred by different organizational
units performing similar tasks to help identify efficient and economic
- Cost analyses tied to work performance standards to better measure
- Comparisons of costs and benefits of alternative methods of delivering
In the Federal Financial community we have not kept pace with our
colleagues in the private sector in integrating financial considerations
into managerial decision-making. This lag has not been without cause.
Decisions made by managers in private industry lend themselves to
relatively straightforward cost/benefit analyses. Here is an example.
In deciding whether to purchase a new, more efficient machine/tool,
one must relate the cost of the machine to the extra profit anticipated
because the new machine can produce more in a given period than the
current machine. In contrast, almost all Federal programs involve
such issues as improving the quality of life of Americans, providing
suitable housing for all citizens, or providing for the Nation's defense.
It is extremely difficult, for example, to reduce to financial terms
the value of extending the average life span of Americans by one year
and matching this value against the cost of a health research program
needed to achieve this goal. In short, the program manager is asked
to put a price tag on a year of a person's life.
Quantifying costs and benefits for Federal programs are problems
that we must solve to help Federal managers make -- from a financial
standpoint -- better decisions. In my opinion this is the area where
accountants can contribute most usefully toward cutting costs and
Managers in Government and industry are the stewards of our Nation's
resources. If we, in the financial and accounting communities, help
managers make better decisions by informing them of the future financial
impacts of alternative actions then we will help Government and industry
produce more for less.
In the General Accounting Office we have been working to integrate
financial considerations into Federal decision-making at two levels;
that is, on a Government-wide level and on an individual agency level.
On the Government-wide level, the General Accounting Office is working
with the Treasury to develop consolidated financial statements for
the Federal Government. This was started in 1976 by former Treasury
Secretary William Simon. To do this, Secretary Simon set up two advisory
committees -- an External Advisory Committee and an Internal Advisory
The External Advisory Committee has finished its work; I was a member;
it included accountants, economists, and business people who dealt
with conceptual issues such as whether the Federal Government should
establish a pension liability on its consolidated statements or what
values the Government should give its assets.
The Internal Advisory Committee, which I chair, is comprised of
high level Federal financial executives. We are developing ways to
implement the External Advisory Committee's recommendations on the
accounting and financial reporting concepts the Government should
follow to develop meaningful, comprehensive financial statements.
This combined GAO/Treasury effort is an attempt to present the Government's
financial condition, results of operations, and future financial commitments
and resources in plain language, using understandable formats. These
statements, when developed more fully, should help the Congress and
citizens assess the overall financial condition of the Government
and select future financial goals and programs. The Treasury hopes
to have business-type financial statements for the Government ready
by the early 1980s.
As I mentioned earlier, the General Accounting Office helps individual
agencies to develop and use effective accounting and financial reporting
systems. In May, we published a booklet to highlight GAO's experiences
and lessons learned over many years of working with Federal agencies
and others in enhancing accounting and accountability in the Federal
Establishment. It is titled "Managers, Your Accounting System
Can Do A Lot For You."
We hope that Federal managers will adopt effective techniques presented
in the booklet and avoid the financial management mistakes illustrated.
Naturally this booklet has its roots in GAO's experiences in reviewing
operations of agency accounting systems, in experiences of accountants
and agency managers in working daily with the information produced
by their accounting systems, and in experiences of accountants and
management consultants who work with Federal agencies in designing
and using accounting systems.
GAO, too, learned something from its work on the booklet: that we
in the Federal Government have important attitudinal problems to overcome
before we effect the full integration of financial information in
managerial decision-making. We found that:
- Many Federal managers believe that accounting and accountants
have primarily a retrospective view of events; that is, they are
Financial scorekeepers of past results of decisions rather than
predictors of the financial consequences of pending decisions.
- Accountants see managers as indifferent to the ways financial
information can be used in managerial decision-making.
- Computer professionals -- who have the tools to integrate accounting
systems and information into the managerial process -- view both
accountants and managers as aloof from the computer field.
When managers, accountants and computer professionals, do not work
together as a team, the quality of managerial decisions -- in financial
terms -- diminishes.
One case study in the booklet showed how at one Federal agency millions
of dollars were improperly transferred between orders for goods and
services received from other Government agencies because:
- Some written explanations for cost transfers did not include enough
information for a reader to evaluate why the transfers were purported
to be made.
- All cost transfer explanations were not reviewed by accountants
to determine if the transfers were proper and warranted approval.
(Accountants could have detected and prevented some of the improper
- Internal audit reports disclosing that improper cost transfers
between orders were ignored by agency managers and executives.
These improper cost transfers resulted in fees unrelated to costs
being charged these agencies. These fees impaired their ability to
relate costs to benefits and select the most economical sources of
supply. They resulted also in distortion of actual costs which precluded
agency managers from analyzing costs in relation to budget amounts
and from identifying cost overruns.
Another case study highlights how managers in an agency used financial
and quantitative information produced by the agency's accounting system
to assign people to the most productive tasks. The agency, a bureau
in a city government, collects taxes from individuals, corporations,
and other businesses. To assure that taxes are property collected,
the city relies on voluntary compliance with tax laws, backed up by
audits of selected returns.
But the agency's audit staff is small. Only a fraction of the large
number of each year's tax returns can be audited. In selecting returns
for audit, managers devised a system, using information in the agency's
accounting records, so audits would yield the maximum amount of additional
The tax return selection system works this way.
- The agency selected a representative period of time as a base
period. Base period productivity indexes were computed for each
type of return by dividing the number of audits by the number of
staff-hours spent. Indexes for subsequent periods were computed
the same way and were plotted on a graph for each type of audit.
- The agency computed a ratio for each type of return showing the
additional taxes resulting from each audit dollar spent. This information
was plotted on a graph to show where audits were producing the most
additional tax revenues.
- The two graphs were analyzed to establish the combination of audits,
by type of tax return, that would yield the maximum additional revenue.
The initial analyses of the graphs disclosed some interesting results.
An analysis over a 5-year period of the audits of one type of return
showed that the average amount of taxes collected for each audit dollar
spent ranged from a high of $1.12 to a low of $0.02 and that it cost
the agency more in audit salary than it realized in additional taxes
in 4 of the 5 years. As a result, managers decided to shift some staff
to higher revenue producing audits, limiting the low payoff areas
to the minimum to sustain voluntary taxpayer compliance.
Where managers, accountants, and computer professionals do work
as a team, an accounting system can be both a predictor as well as
an historical record.
The money and other resources given Federal managers, or managers
in a private corporation, are a trust from the owners of those funds
and resources, Therefore, managers are accountable for seeing that
those funds and resources are used only for authorized purposes and
are not misused, wasted, lost, or stolen.
Accounting systems can and must be the first line of defense, against
fraud and misuse, abuse and waste of resources.
Recent revelations of the misuse of Government and corporate resources
and of fraud and abuse in both the public and private sectors -- the
General Services Administration and Equity Funding scandals just to
mention a few -- have led the general and investing public to feel
the accounting profession was negligent. White collar, and particularly
computer related crimes, increasingly make the headlines.
The accounting profession must act now to explore ways to use the
computer to assist managers in strengthening internal controls over
funds and other resources and to develop advanced audit techniques
to detect fraud and abuse. Some techniques the profession should evaluate
- Improved access controls to computer based accounting systems
-- especially those systems based on the wire transmission of information.
- Sophisticated computer edit checks of information entered into
the computer for processing to reject from further processing, and
report to managers all questionable transactions.
- Automatic sampling of transactions for audit while transactions
are being processed through the automated accounting system.
- Incorporation of audit features in large computer systems to help
auditors and managers determine exactly how computers process information---like
an integrated test facility which allows one to process test transactions
through the computer along with normal transactions.
Current state-of-the-art in the computer sciences offers the accounting
profession the opportunity, tools, and techniques to augment accounting
and internal controls of an organization's resources and provide for
the detection and prevention of fraud and the misuse and abuse of
The General Accounting Office's current research and development
efforts in accounting and Financial reporting to deal with fraud and
misuse or abuse of resources, include two thrusts: improved computer
based auditing techniques and enhanced controls for computer based
To improve computer based auditing techniques, the General Accounting
Office developed several audit guides to help its professional staff
evaluate the adequacy of controls in agency automated accounting systems.
These audit guides were distributed to Federal agencies and many organizations
outside Government. They include:
- A guide to help our professional staff assess the adequacy of
internal controls in automated systems and the degree of reliability
of information in agency computer produced reports. The results
of these assessments are used in scoping further audit work.
- A guide on developing sets of test transactions to determine how
an accounting system's computer programs will handle correct and
incorrect transaction information. This audit guide was devised
primarily for reviews of automated payroll systems, but the basic
principles are applicable to creating sets of test transactions
for any automated financial or administrative system.
We also are drafting a review guide for completing computer performance
evaluations of agency computer systems. This guide will help our professional
staff, with the assistance of expert consultants, to measure how efficiently
the equipment resources in an agency computer system are used. Methodologies
in this guide include using complex hardware and software monitors
to measure how much of the practical capacity of a given computer
configuration is used for productive work.
When computer specialists, accountants, and auditors work as a team,
the best results are achieved. Each professional contributes the expertise
of a specialty, and the combination of accounting and computer science
equals a most effective evaluation.
On a recent review of the automated accounting system supporting
a large Federal program, General Accounting Office auditors and computer
specialists collaborated in evaluating system operations. Our work
resulted in the agency improving controls over cash receipts and reducing
computer costs by restructuring the automated master files. We could
not have helped the agency improve controls over cash receipts and
reduce computer operating costs if auditors and computer specialists
had not cooperated in the review.
The same cooperation between accounting and computer science professionals
in designing an accounting system can produce a system with superior
accounting and internal controls over an organization's resources.
At one Federal agency accountants and computer professionals together
planned and implemented an accounting system with superior controls
over accounts receivable. The system is run so it:
- Records amounts due and paid, promptly and accurately.
- Generates timely invoices to customers when services are rendered.
- Produces followup letters at 30-day intervals when invoices are
- Refers accounts over 180 days overdue to the legal department.
- Charges customers 12 percent per annum interest on all invoices
not paid within 30 days of the billing date.
The agency's accounts receivable system helps managers collect amounts
due the Government in full and on time, For example:
- 95 percent of all bills were paid within 30 days of the invoice
- Followup on overdue accounts is highly effective; in a recent
fiscal year, the agency wrote off only one account -- of $5,000.
- $724,000 in interest on overdue invoices was levied and collected
by one of the agency's field units in a recent fiscal year.
Recently, the General Accounting Office cooperated with a major
Federal Department to design and implement an integrated test facility
in an automated accounting system for a massive Federal income security
program. An integrated test facility in an automated system consists
essentially of setting up a segregated portion of the system's masterfile
for auditor's "dummy" or test master records. Once we established
the test master records, our auditors and the agency's staff could
mix test transactions with normal transactions to see how the system
would react to correct and incorrect transaction information. Since
the agency's system was based on wire transfer of information from
field offices to a central computer facility, the integrated test
facility allowed our auditors to enter test transactions via remote
computer terminals to test controls built into the agency's communications
We, in the General Accounting Office, feel our work to date has
only scratched the surface. We have a long way to go before all Federal
agencies have accounting systems that are effective first lines of
defense against fraud and misuse and abuse of resources. We also have
a long way to go before we learn how to effectively use the computer
to build first-rate controls into agency financial and administrative
The accounting profession has been challenged to modernize its services
to its clients and to the general public. The profession needs to
begin a research and development program -- as I outlined earlier
-- to update the kinds of information accountants and accounting systems
Accountants in the Federal Government need the help and support
of their professional colleagues in the private sector to solve the
many accounting and financial reporting problems that challenge us.
The accounting and accountability problems that face Government may
also apply to some degree to profit and nonprofit organizations in
the private sector. If we do not work together these problems are
not likely to be solved; if we do work together the performances of
Government departments and agencies will greatly improve.