for Accountability and Sustainability
GAO: Promoting Fiscal Responsibility in Government
CPA Journal Interview with the Honorable David M. Walker,
Former Comptroller General of the United States
- The U.S. Comptroller General heads the Government Accountability
Office (GAO), a legislative branch support agency whose mission
is to improve the performance of the federal government and ensure
its accountability to Congress and, ultimately, the American people.
David M. Walker, the seventh U.S. Comptroller General, served
from November 1998 until March 2008, when he resigned to become
the CEO of the newly created Peter G. Peterson Foundation. The
Peterson Foundation will be dedicated to seeking solutions to
selected key sustainability issues facing the United States, including
entitlement programs and the nation’s healthcare system.
In addition, Walker was elected as the first chairman of the Independent
Audit and Advisory Committee of the United Nations. Walker’s
15-year term as Comptroller General was set to expire in 2013.
Gene Dodaro, GAO’s chief operating officer, will serve as
acting Comptroller General until the President chooses a replacement
from a list of congressionally nominated candidates.
Editor-in-Chief Mary-Jo Kranacher met with Walker at the
Cornell Club in New York City during the International Federation
of Accountants (IFAC) World Accountancy Forum in December 2007.
They discussed a wide range of issues, including fiscal responsibility,
single audits and the Yellow Book, accounting education, CPA licensure
and portability, Social Security and Medicare, and intergenerational
equity. In late February 2008, Kranacher contacted Walker for
comments on his resignation and his thoughts, in retrospect, on
his tenure; his parting comments appear in the final section below.
CPA Journal: During your recent “Fiscal Wake-up Tour,”
you’ve spoken to many different audiences about fiscal responsibility
and accountability. Complexity has been an ongoing problem with
financial statements—the GAO has issued a disclaimer on
the federal government’s financial statements for 10 years
in a row now. How do you convince citizens that they need to be
fiscally accountable when the leaders of their federal government
have been so irresponsible?
U.S Comptroller General David M. Walker:
The federal government is not leading by example, and that needs
to change. More broadly, too many people are following the bad
example, set by the federal government, of spending more money
than they make—borrowing more money in the form of credit
card debt, home equity loans, and mortgaging their future. That
has to change. I think the current administration is taking financial
management seriously. Progress has been made on that front, but
we’ve lost a lot of ground in recent years.
impediment to GAO being able to express an opinion on the consolidated
financial statements of the U.S. government continues to be the
Department of Defense. The Department of Defense spends hundreds
of billions of dollars a year. They are excellent at fighting
and winning armed conflicts; they are terrible at economy, efficiency,
transparency, and accountability. They are making financial management
a priority, but it’s going to take several years before
they can withstand an audit. The Defense Department’s current
goal is 2017.
Do you think that Sarbanes-Oxley–like regulations would
be helpful to implement for governments and nonprofit organizations?
Walker: I think some elements of Sarbanes-Oxley
have merit for governments and nonprofits, but not all. You have
to keep in mind who will sign the statements. In most cases in
government, they’re going to be political appointees. What
kind of sanctions can you apply to them? At the same time, some
aspects of Sarbanes-Oxley make sense.
GAO was ahead of Sarbanes-Oxley—we voluntarily expressed
an opinion on internal accounting controls over financial reporting,
years before Sarbanes–Oxley existed. We’ve encouraged,
but not required, other government auditors to do the same. We
dealt with independence issues before Sarbanes-Oxley. We were
the ones who took on the issue of nonaudit versus audit services.
We took a lot of heat for it, but we felt it was the right thing
to do. I think time has vindicated us on this issue. So, I think
we have to look at what makes sense and what doesn’t make
sense, rather than trying to implement something whole-cloth.
Yellow Book and Single Audits
On June 22, 2007, the President’s Council on Integrity and
Efficiency, a group comprised primarily of Inspectors General,
released a report on the National Single Audit that spoke to the
quality and usefulness of audits of organizations with federal
grant expenditures in excess of $500,000. According to the report,
51% of those audits, most of them performed by CPA firms, were
deemed unacceptable. Would you support establishing minimum educational
standards for accountants conducting single audits?
there are continuing professional education requirements with
regard to audits that are done in accordance with the Yellow Book.
I would have to think about that more before proposing how much
further we need to go. I will say that we need to look more closely
at the dollar threshold at which single audits are applied.
I also believe
we have to revisit the question of what we are trying to achieve
from single audits. They should be streamlined and simplified.
And finally, much as the AICPA focused on an audit-quality problem
with regard to employee benefit plans, they also recognized that
there is an audit-quality problem in governmental audits, single
audits in particular. The AICPA’s establishment of its Audit
Quality Center is a positive step. The question is what, if anything
else, should auditors be required to do on a mandatory basis versus
a voluntary basis. That’s a question that requires further
In addition to those award programs that originate with federal
funding, significant numbers of state-funded programs administered
by local governments and not-for-profit organizations do not have
a clearly defined set of audit standards. What are your thoughts
on the possibility that those state-funded programs or organizations
which expend a certain dollar figure, whether it be $500,000 or
more per year, should be audited in accordance with the Yellow
Walker: First, nothing precludes states from embracing
the Yellow Book. In fact, many states have already legislated
that certain audits have to be done in accordance with the Yellow
Book. And not just states; many countries have adopted the Yellow
Book, some of which might surprise you, such as Vietnam.
I think we
have to keep in mind that, under the Constitution, there exists
a separation of powers; it is not just with regard to the three
branches of the federal government, but also with regard to the
different levels of government. While I think it’s fully
appropriate that states consider voluntarily adopting the Yellow
Book standards, I would be somewhat concerned with the federal
government imposing that requirement when there is no federal
money involved. I think that could raise some Constitutional questions.
So, as far as you’re concerned, then you would be somewhat
hesitant to recommend that the Single Audit Act apply to state-funded
I think that the states can learn from the single audit concept,
and I think it would be desirable for states to try to apply the
single audit concept. I think it would be good for the states
to work together, and possibly in conjunction with the GAO, OMB,
AICPA, and other federal government agencies, to make that a reality.
I think that is a very desirable thing. But that’s very
different than the federal government mandating that states comply
with the Single Audit Act.
There’s been a lot of talk about the lack of competition
within the auditing profession, with the large firms auditing
most public companies. In my interview with [PCAOB Member] Bill
Gradison, he mentioned that the GAO recently completed a study
on this issue. Can you share the findings of that study?
Walker: We updated a study that we conducted several
years ago on the degree of concentration of audit firms among
different sizes of public companies. Basically, the bottom line
is that there has been, and continues to be, a concentration of
audits of the largest public companies within the top four firms.
That’s been the case for quite a while. And, there is a
variety of reasons why that’s so.
however, been somewhat greater penetration by non–top firms
into the second tier of public companies, for a variety of reasons.
I think in some cases the top four have had a capacity challenge
and have made various judgments as to which entities they may
have audited in the past and whether they continue to audit them.
The decisions are not necessarily about liability risk, but potentially
about concerns with regard to profitability and other considerations.
Do you believe in the concept that a firm may be too large to
fail, and that the government should impose itself to prevent
Walker: I think there are concerns right now, but
I wouldn’t say that the top four firms are too large to
fail. I think some people are concerned about whether or not we
can afford for another large firm to fail, because of the further
concentration and the impact that might have on audit quality,
choice, and cost.
As you know,
although we moved from the so-called Big Eight to the Big Four,
the Justice Department actually opposed going from the Big Six
to the Big Five. Ironically, the government caused the move from
the Big Five to the Big Four by indicting Arthur Andersen as a
firm rather than the responsible individuals. The Supreme Court
later said the Justice Department overreached in its indictment,
but by that time, the market had reacted. It was too late. We
have to keep in mind that, as certified public accountants, we
are in the trust business, and if there is a breach of trust,
it can have catastrophic consequences.
When these large firms merged, the applications they filed with
the SEC provided assurances that competition would not be affected.
Yet now it seems that those same firms are promoting concern in
the public sector on this issue for their own benefit.
Walker: The GAO conducted a survey of key stakeholders—chairmen
of audit committees, chief financial officers, and other key executives—and
asked them whether they felt that they had adequate choice and
whether they felt there was too much concentration in the audit
profession. I think you might be surprised with their responses.
Note: The full GAO report and survey results, released
shortly after this interview was conducted, are available at www.gao.gov/special.pubs/gao-08-164sp/.]
Technology has made the globalization of society and business
possible and made physical geographic borders less of an obstacle.
The issue of mobility has been widely discussed within the accounting
profession, because states control licensure and have an obligation
to protect the public within their borders. What are your thoughts
on using an interstate compact to regulate and enforce compliance
within the accounting profession?
Walker: I think we need to do more to recognize
the reality that political borders are of less significance both
domestically and internationally, because of the globalization
of business, the globalization of markets, and increasing interstate
commerce activity within the United States. That’s just
I think while
ultimately each state is responsible and accountable for what
happens within its borders, there are many opportunities to do
things more efficiently, more economically, and more effectively
by working on an interstate basis. Firms are doing business in
multiple jurisdictions. The market demands expertise, not just
with regard to industry expertise, but also functional expertise.
It’s totally unrealistic to expect that these experts should
not practice across
political boundaries to provide quality client service.
How would we be able to achieve cross-border mobility absent federal
action? Could a compact or some other type of agreement between
the states work?
Walker: By compact, I am assuming that there would
be a voluntary agreement among the states to address a broader
national need while ensuring that they are protecting their citizens.
So that’s the key. I think such an agreement would be very
desirable. I think it’s up to the states to take action.
The federal government can encourage cooperation and mobility,
but that’s different than requiring it. Needless to say,
I think the profession and the business community ought to be
encouraging it too.
You have been a big supporter of accounting education in the past.
As an educator, I have been following a lot of what you have proposed.
The 150-hour requirement has been adopted by most states, yet
it has received mixed reviews regarding its benefits, primarily
because there have been no real specific guidelines as to the
content of those additional 30 credits. A major concern of employers
has been the level of professional literacy among graduates: adequate
reading, writing, listening, and verbal communication skills,
as well as research skills and critical thinking. Traditional
advanced degrees have addressed those sorts of issues and enhanced
a graduate’s skills in that area. Do you believe that a
graduate-level degree should be a requirement for CPAs?
Walker: Most 150-hour programs that I am familiar
with do result in a graduate-level degree. But it is not required,
and I agree with that. Rather than determining whether a graduate-level
degree is required, I think the more important issue is the cost
versus the benefit of the 150-hour requirement given the current
and expected supply-and-demand issue facing our profession. Second,
and probably more important, what do you get for the extra 30
hours? What type of additional skills and knowledge are being
obtained with those additional 30 hours, and to what extent are
they meeting the needs of the profession and its client base?
Just because you get a master’s degree doesn’t mean
you’re going to have the right curriculum.
I think we
need to focus on what the problem is. What is the cost-benefit
of the 150-hour requirement? If we are going to have that 150-hour
requirement, what can be done to enhance that cost-benefit by
making sure that the additional knowledge gained is valuable to
both the firm and its clients?
So you believe that there should be more specificity on what the
additional 30 credits should entail?
Walker: That is something we should look at. Ultimately,
the market will react here, because those programs that do a better
job ultimately will be rewarded. Their graduates will be hired
and possibly receive multiple job offers, they will earn more
money, and they will make quicker progress in their careers. Our
profession faces a challenge, however: We have increasing demand
and limited supply. So it is not just the micro-issue of dealing
with a particular institution. We’ve got to make sure that
we have an adequate supply of accountants with adequate skills
and knowledge, in the aggregate. It takes longer for the market
to take care of that issue than it does to address education on
a micro-basis. This supply-and-demand imbalance is also a big
problem with accounting educators.
for Postemployment Benefits
By some estimates, state and local governments owe their current
and future retirees roughly $375 billion more than they have committed
to their pension funds. Are there any plans to address the problem
of underfunding of postemployment benefit plans?
Walker: First, state and local government pension
plans and retiree healthcare plans are not subject to the Employee
Retirement Income Security Act. Furthermore, even private-sector
employer-sponsored retiree health plans are not required to be
funded. They are not subject to the minimum funding standards,
they are not insured, and they are not subject to anti-cutback
provisions in the Internal Revenue Code. They are basically subject
to contract law.
As you know,
in the late 1980s and early ’90s, FASB promulgated a change
in accounting and reporting for private-sector employer-sponsored
retiree healthcare, and there was a major marketplace reaction.
The fact is many employers for the first time realized the magnitude
of what they had promised to their employees.
We will likely
see some reaction in the state and local government sector on
this issue as well. But I don’t think the reaction will
necessarily be the same, because a much higher percentage of state
and local government workers are covered by collective bargaining
agreements than private sector workers. And state and local governments
have certain powers that private employers don’t have, namely
the power to tax. At the same time, if governments want to maintain
their bond ratings, and if they want to deal with future fiscal
challenges, such as Medicaid costs, unfunded retiree healthcare
costs, underfunded pension plans, and deferred maintenance and
other critical infrastructure costs, they are going to have to
re-examine these plans and think about whether the promises need
to be restructured, at least for new employees, and whether they
want to start funding some of these obligations.
I think there
will be much more fundamental soul-searching going on, other than
just solely whether state and local governments are going start
funding these amounts. They will look at what they promised, what
they can afford, and whether changes are needed.
During the panel discussion at the IFAC meeting, you referred
to Social Security and suggested that it should be disclosed,
but not necessarily accrued, as an obligation. Can you explain
Walker: Social Security is probably the most successful
and valued federal program there is. At the same time, when you
look at Social Security, under current accounting and reporting
principles, amounts that are due but unpaid are recorded as a
liability. However, an additional amount ought to be recorded
as a liability in the form of deferred revenue.
is that every year the federal government takes in $150–$200
billion more in payroll taxes for Social Security than it pays
out in benefits. And it replaces that excess cash with a bond
that is guaranteed by the full faith and credit of the U.S. government,
both principal and interest. It will be honored and it is counted
in the federal government’s debt ceiling limit, but it is
not shown as a liability for the U.S. government. I think that’s
wrong and it needs to change. It serves to understate our liabilities,
our operating deficits/net operating cost, and our debt/GDP ratios.
I do not,
however, believe that the trillions of dollars in discounted present
value—the difference between what’s been promised
for Social Security and Medicare over the coming decades and the
amount of dedicated payroll taxes, premiums, and other revenues
we have available to meet those promises—should be booked
as a liability today, for a variety of reasons. One of which is
that, in the case of pensions and retiree healthcare, an individual
exchanges their services, their labor, for current and deferred
compensation. Therefore, there is an exchange transaction that
takes place. That’s not the case with Social Security and
What about payroll taxes?
ought to be a liability for the amount of payroll taxes collected
in excess of the amount currently needed by Social Security and
Medicare. In terms of recognizing liabilities: Yes, with regard
to excess payroll taxes, but no, with regard to benefits that
might be paid 40 or 50 years from now. For someone who is 18 years
old and is paying payroll taxes today, what is important right
now? To me, what’s important is not to get into a debate
about what’s a liability and what’s not a liability.
At a minimum, these are unfunded obligations and we need to provide
adequate transparency regarding them. We also need to help people
understand the implications for future generations if we continue
on our current fiscal path.
we are doing that to a certain extent with the current statement
of social insurance. Furthermore, I and others have strongly advocated
for a new statement on fiscal sustainability that would address
intergenerational equity. There is a clear and compelling need
for such accountability, and it could take us to a new level of
understanding and public engagement in these issues
Would this new “statement on intergenerational equity”
simply show the change over a period of time rather than a specific
dollar amount or figure?
Walker: Well, there is still a debate over what
such a statement would encompass. The Federal Accounting Standards
Advisory Board is now addressing the issue. From my standpoint,
I think we need to show discounted present-value dollar numbers
today and how it changes from year to year. Additionally, we need
to translate those numbers into something that’s meaningful
to Americans. How much does it mean per person? How much does
it mean per household? What does it mean to likely tax burdens
10 years from now, 20 years from now? We need to start converting
some of these numbers that are mind-boggling, numbers that people
can’t relate to, like tens of trillions of dollars, and
translate them into terms that people can relate to. That would
truly make government accountable to its citizens.
and Parting Comments
accomplishment during your nearly 10-year tenure as U.S. Comptroller
General are you most proud of?
Walker: By partnering with others, both internally and externally,
GAO has accomplished a tremendous amount in the past nine-plus
years. I am particularly proud of the fact that we have accomplished
all but one of the major goals that I outlined for my 15-year
term when I started in 1998. My new position as CEO of the Peter
G. Peterson Foundation will allow me to focus more time, energy,
and financial resources towards achievement of the remaining goal—making
a down payment on our $53 trillion-plus fiscal burden and getting
policymakers to begin to act on several key sustainability and
transformation challenges that threaten the future of both America
and Americans. I also take a great deal of comfort in knowing
that I am leaving a GAO that is more visible, viable, and vibrant.
Stated differently, GAO is in excellent shape and I’m leaving
the agency in good hands.
In retrospect, is there anything you would have done differently
during your tenure?
Walker: In hindsight, we should have offered a “floor
guarantee” to all GAO employees who were affected by our
Band II restructuring and our move to a more market-based and
performance-oriented pay system. GAO management did so as part
of our recent labor agreement, and I have proposed that a related
statutory amendment be made to provide for such a “floor
guarantee” in the future. In my view, this concept also
has great merit in connection with other agencies that are seeking
to move to more market-based and performance-oriented pay systems.
What advice would you offer to the next U.S. Comptroller General?
Walker: Stay the course. GAO has put in place a
solid infrastructure of policies, systems, and processes that
have helped us to significantly increase our outcome-based results,
even while reducing our headcount and institutional risks. Most
important, GAO needs to remain dedicated to the core values (i.e.,
accountability, integrity, and reliability) and the simple but
powerful concepts that we adopted early in my tenure. These concepts
include leading by example, practicing what you preach, constructive
engagement, and continuous improvement.