THE GENERAL ACCOUNTING OFFICE (GAO) CONDUCTED THE REVIEW OF AUDITS FO THE INSTITUTIONS TOGETHER RECEIVING OVER $3.7 BILLION IN FEDERAL SUPPORT OVER THE STUDY PERIOD. GAO CONCLUDED THAT HEW WAS TRYING TO DO TOO MUCH WITH TOO FEW AUDIT RESOURCES. ACCORDINGLY, AUDITS WERE NOT CONDUCTED AS FREQUENTLY AS THEY SHOULD HAVE BEEN AND WERE OMITTED ENTIRELY AT A NUMBER OF INSTITUTIONS. GAO ALSO NOTED THAT CERTAIN PHASES OF SOME AUDITS WERE NOT PERFORMED IN A MANNER CONSISTENT WITH GAO AUDIT STANDARDS. FINALLY, WHILE RECOGNIZING THE DIFFICULTIES POSED BY INADEQUATE INSTITUTION ACCOUNTING SYSTEMS, GAO BELIEVES THAT HEW NEDS TO DO A BETTER JOB OF VERIFYING COST ALLOWABILITY. GAO RECOGNIZES THAT THE SHORTAGE OF AUDIT RESOURCES HAS SIGNIFICANTLY CONTRIBUTED TO THESE SHORTCOMINGS AND THUS RECOMMENDS THAT HEW'S INSPECTOR GENERAL REASSESS THE PRIORITIES TO WHICH HIS AUDIT STAFF IS ASSIGNED TO SEE IF ADDITIONAL EFFORTS COULD BE DEVOTED TO UNIVERSITY AUDITS. THE INSPECTOR GENERAL INDICATED THAT A MAJOR REFORM IS UNDERWAY TO INCLUDE (1) SIMPLER FEDERAL REGULATIONS WITHOUT LOSS OF SAFEGUARDS, (2) IMPROVED PROCEDURES FOR THE PROMPT RESOLUTION OF AUDIT FINDINGS, (3) EARLY AUDIT REVIEW SERVICE ON PROPOSED CHANGES IN INSTITUTIONS' ACCOUNTING SYSTEMS, AND (4) SANCTIONS AGAINST INSTITUTIONS AND INDIVIDUALS WHEN CORRECTIVE ACTIONS ARE NOT TAKEN IN A REASONABLE TIME PERIOD. APPENDIXES PROVIDE THE TEXT OF GAO'S RECOMMENDATIONS, AND DELINEATE HEW'S RESPONSE TO THE REVIEW. CORRESPONDENCE IS ALSO APPENDED. (AUTHOR ABSTRACT MODIFIED-MHP)