International Journal of Auditing – April 2006

21st Century Challenges - A Role for SAIs in Managing Change and Mitigating Risk - A message from David M. Walker, Comptroller General of the United States

Nations around the world face an array of current and emerging challenges. Some of these challenges are country specific, while others—such as environmental and public health issues—know no geographic or political boundaries. In some cases, these challenges will bring great opportunities that can be capitalized on, but there will also be serious risks that must be managed.

Several powerful trends that were little known just a generation ago are rapidly reshaping our world. These include the globalization of markets, enterprises, and information; changing demographics, including aging populations in much of the developed world; the emergence of terrorism as a major security threat; and the changes wrought by rapidly evolving technologies. The United States and many other countries are also experiencing a growing and unhealthy gap between the haves and the have-nots.

Over the years, supreme audit institutions (SAI) have earned a reputation for promoting transparency, fighting corruption, improving government performance, and ensuring public accountability. I believe SAIs can leverage that credibility to address the long-term trends I have just described. Increasingly, audit offices should be prepared to anticipate future challenges; sound the alarm when necessary; and propose options for addressing issues, managing change, and mitigating risk.

Obviously, different trends will not affect all nations and SAIs in the same way.
Perhaps the most urgent issue for the United States is its deteriorating fiscal outlook. Most nations face some degree of long-term fiscal risk. For example, a 2005 European Commission report warned that because of the growing old-age dependency ratio in Europe, there is “a risk of unsustainable public finance emerging in about half of the European Union member states.”

However, the difference is in the scope and potential effect of the U.S. situation.
Today, the United States confronts not one but four interrelated deficits that threaten its long-term standard of living at home and its future role in the world. These are (1) a growing federal budget deficit, (2) a personal savings deficit, which is particularly alarming in its aging society, (3) a balance-of-payments deficit, and, (4) perhaps most sobering of all, a leadership deficit.

In both government and private industry, there have been few calls for fundamental reform or shared sacrifice. In fact, the U.S. government’s continuing lack of fiscal discipline has only made things worse. The U.S. business community has been largely silent on this growing fiscal imbalance, but it has the potential to be an important champion of change. Private industry has a strong stake in this issue because if the federal government continues on its present course, companies are going to pay a price, such as higher borrowing costs, rising taxes, or slower economic growth.

It would be a mistake to conclude, however, that America’s fiscal problems are strictly a domestic concern. The continuing health of the U.S. economy promotes global stability and provides economic opportunities for both the developed and the developing world.

As head of the U.S. Government Accountability Office (GAO), I have been speaking out lately on this and other looming challenges facing my country. In newspaper and magazine articles and speeches before various audiences, I have tried to both explain the problem and suggest ways to turn things around. For example, I strongly advocate greater transparency in federal finances along with a top-to-bottom review of what the U.S. government does and how its does business. Since most SAIs are insulated from day-to-day political pressures and have a reputation for professionalism, independence, and integrity, they can and should be playing a similar “foresight” role.

Collaboration will be important to the success of these efforts. By partnering with their peers, SAIs will be able to draw on a range of best practices and professional standards to help them develop solutions to national or even regional concerns. This is one reason we at GAO are so strongly committed to working with our overseas counterparts and with international auditing organizations such as INTOSAI. In a world that is growing smaller every day, global convergence on major accounting and audit standards, reporting models, and audit reports is not only desirable, it is essential. Accounting and reporting practices in Brazil or Belgium should be equally understandable to auditors elsewhere in the world. I am happy to report that significant progress is being made in this area, along with the development of ethical codes for government auditors and the establishment of best practices on vital issues like public debt management, environmental auditing, and privatization.

More than ever, SAIs have an opportunity and obligation to encourage sound and sustainable policy choices. These choices are more likely when policymakers are equipped with solid facts and unbiased analyses, not political spin. Recent history provides two examples of countries whose leaders took very different approaches to looming challenges. Before World War II, Argentina was one of the most prosperous nations in Latin America. Today, largely because of a combination of poor policy choices and outright inaction, Argentina has serious economic problems. In 2001, it experienced the largest public debt default in history, and its standard of living has steadily eroded.

On the other hand, there is New Zealand, which—like the United States, Europe, and Japan—has an aging population. Unlike the United States, however, New Zealand has taken steps to deal with the growing burden associated with its government pension system and other public benefits. At the same time, New Zealand has begun to transform how its government does business. New Zealand is a work in progress, but at least its leaders have acknowledged the challenges at hand and have begun to address them.

It is time for the United States and many other nations to face facts and prepare for the known challenges that lie ahead. The truth is, whether we live in Washington or Moscow, Beijing or Buenos Aires, or Cairo or Canberra, we are increasingly in the same boat. No country or SAI can or should try to do it alone, and the more we partner together to develop solutions to these shared problems, the greater the chances of success. The choice is simple. We can start rowing together, or we can risk sinking separately.