Striving for Accountability and Sustainability
GAO: Promoting Fiscal Responsibility in Government

A CPA Journal Interview with the Honorable David M. Walker,
Former Comptroller General of the United States

By Mary-Jo Kranacher

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APRIL 2008 - 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.

CPA Journal 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.

The 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.

The biggest 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.

CPAJ: Do you think that Sarbanes-Oxley–like regulations would be helpful to implement for governments and nonprofit organizations?
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.

Frankly, 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.

The Yellow Book and Single Audits

CPAJ: 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?
Walker: Well, 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 thought.

CPAJ: 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 Book?
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.

CPAJ: So, as far as you’re concerned, then you would be somewhat hesitant to recommend that the Single Audit Act apply to state-funded programs.
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.

Competition and Consolidation

CPAJ: 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?
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.

There has, 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.

CPAJ: Do you believe in the concept that a firm may be too large to fail, and that the government should impose itself to prevent such failure?
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.

CPAJ: 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.
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.

[Editors’ Note: The full GAO report and survey results, released shortly after this interview was conducted, are available at]

Licensure and Education

CPAJ: 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?
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 the reality.

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.

CPAJ: 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?
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.

CPAJ: 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?
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?

CPAJ: So you believe that there should be more specificity on what the additional 30 credits should entail?
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.

Accounting for Postemployment Benefits

CPAJ: 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?
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.

Intergenerational Equity

CPAJ: 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 that further?
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.

The fact 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 Medicare.

CPAJ: What about payroll taxes?
There 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.

In fact, 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

CPAJ: Would this new “statement on intergenerational equity” simply show the change over a period of time rather than a specific dollar amount or figure?
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.

Reflections and Parting Comments

CPAJ: What 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.

CPAJ: In retrospect, is there anything you would have done differently during your tenure?
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.

CPAJ: What advice would you offer to the next U.S. Comptroller General?
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.





















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