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Protecting
the Tax Dollar
Focusing on the Quality of Federal Grant–Funded
Audits
SEPTEMBER 2007
- In auditing and attestation, the phrase “expectation gap”
is often used to describe the difference between what CPAs do and
what the public thinks CPAs do, especially regarding fraud. Members
of the public generally believe that a CPA’s job is to ensure
that financial statements are 100% accurate. Members
of the profession, however, generally see the CPA’s job as
providing reasonable assurance that financial statements are accurate
by adhering to professional standards. The
expectation gap was the theme of this year’s annual NYSSCPA
Leadership Conference, and, as it turns out, this theme could
not have been more timely.
On June 22,
2007, the President’s Council on Integrity and Efficiency
(PCIE) released a “Report on National Single Audit Sampling
Project.” The PCIE is mainly comprised of state and federal
Inspectors General (IGs—high-ranking, Presidentially appointed
officers who examine the actions of agencies to ensure their compliance
with the established policies of the government, or to discover
the possibility of fraud or waste), as well as representatives
from the executive branch, such as executives from the Office
of Government Ethics, the Office of Management and Budget (OMB),
and the FBI. This sobering report concerns the quality and usefulness
of audits of organizations that receive federal grants in excess
of $500,000. According to the report, a staggering 51% of those
audits, all of them performed by CPA firms, were not “acceptable.”
By examining
a random sample of 208 of the 38,000 federal-grant audits for
the period of April 1, 2003, through March 31, 2004—from
government agencies to public schools, colleges and universities
to nonprofit organizations and Native American tribes—the
report of the Inspectors General found that only about 49% of
the audits were “acceptable,” while 16% had “significant
deficiencies and thus were of limited reliability” and approximately
35% were “unacceptable and could not be relied upon.”
The report
is discouraging news for both taxpayers and CPAs. For taxpayers,
it means that, in many cases, federal grants may not be accurately
accounted for. This does not mean that money was stolen or spent
inappropriately, but it does mean that the assurance the public
expects was not delivered. Members of the public generally believe
that checks and balances ensure that their tax dollars are appropriately
managed and spent, but the report’s findings lead to the
exact opposite conclusion. Audits that cannot be relied upon make
it impossible to determine whether taxpayer-funded grants are
being used effectively. And that is not fair to taxpayers.
The report
of the Inspectors General could result in another black eye for
the profession. Politicians and regulators may wonder why the
accounting profession did not do more, sooner, to fix failed audits.
Indeed, for many New Yorkers, the report underscores the fact
that the profession has yet to sufficiently address the problems
identified in the Roslyn school district scandal, which saw the
district’s independent auditor plead guilty to tampering
with public records and ultimately lose his CPA license. The school
district superintendent, chief business administrator, and three
other employees were also arrested for allegedly stealing millions
of dollars from the district.
Readers of
the report may not differentiate between auditors of entities
that receive government grants and the entire CPA profession.
For better or worse, each time a CPA firm undertakes an engagement,
it is representing not only itself, but the entire profession.
The reputations of thousands of hard-working CPAs are tainted
whenever an audit is found to be unacceptable.
But perhaps
the most discouraging conclusion would be this: After so many
failed audits over the last several years—in the government
sector and the corporate world—many may find the report’s
results unsurprising. As an alarming footnote, every single CPA
firm that performed these failed audits—like the CPA firm
that audited Roslyn—was a peer-reviewed firm.
The
Road Ahead
Two major
issues need to be addressed before moving forward, and both relate
to the fees paid to—and accepted by—the CPA firms
being hired to perform these audits.
The first
issue falls squarely on the shoulders of some of the grant-receiving
entities that are required by law to have their financial statements
audited. Some of these entities are required to solicit multiple
bids for auditing jobs, and requiring multiple bids is good governance
and cost-effective. But many entities with large and complex audits
overlook quality in pursuit of the lowest bidder, which puts CPA
firms in the difficult position of walking away from audit work
that could be performed only under very unsatisfactory conditions
for everyone concerned—the entity, the firm, and the taxpayers.
Grant-receiving
entities should be looking for the lowest-priced responsible
bidder; soliciting multiple bidders should never be confused with
seeking a bid so low that the CPA firm offering it could not possibly
perform quality work. Local officials making these decisions are
often concerned with minimizing local expenditures, including
audit fees. But selecting an irresponsibly low bid never lowers
the expectations of governments, nonprofits, legislators, or the
public that an audit be performed flawlessly.
However,
the blame does not rest solely with grant-receiving entities.
CPA firms that accept unjustifiably low fees are no better than
the grant-receiving entities selecting them. Before submitting
a bid that does not provide sufficient resources to do an “acceptable”
job, firms would do well to remember two extremely important provisions
of the AICPA’s quality-control standards. These standards
fall under the category of “Acceptance and Continuance of
Clients and Engagements,” and say that a CPA firm should
have policies and procedures in place to provide reasonable assurance
that it:
- “Undertakes
only those engagements that the firm can reasonably expect to
be completed with professional competence; ” and
- “Appropriately
considers the risks associated with providing professional services
in the particular circumstances.”
Although
these standards may sound like nothing more than common sense
(of course firms should consider risks and undertake
only those engagements they can complete with professional competence!),
they can easily be taken for granted. As we’ve seen too
many times, especially with publicly funded clients, winning a
bid is easier than doing the job right.
These quality-control
standards are meant to ensure quality, and the consequences of
overlooking them are far-reaching and severe. CPA firms need to
realize that a winning bid which is too low for them to perform
the highest-quality work is nothing more than a Pyrrhic victory.
When a CPA firm performs work that is anything less than the highest
quality, everybody loses—the firm, the client, the profession,
and the public.
That is why,
before even bidding on an audit, firms must perform their due
diligence and submit realistic bids based on:
- The requirements
of the engagement;
- Their
ability to assign experienced and qualified partners, managers,
and staff; and
- Their
ability to allocate sufficient time and resources to competently
complete the audit in accordance with applicable professional
standards and government regulations.
If firms
lack the necessary resources to perform a high-quality job, they
should walk away from the engagement. Firms must be absolutely
sure that they can not only do the job, but that they can do the
job well. The profession’s reputation depends on
it.
Start
Spreading the News
Imagine,
for a moment, that the IG’s report had been issued earlier,
before the Roslyn scandal. Could it have served as a warning signal,
avoiding some of the audit failures that have occurred since?
We’ll never know, but it’s very possible. Regardless,
the report is out now and the profession must seize this
opportunity. It must not pretend that problems don’t exist,
because that is not the way problems are solved. CPAs should begin
an honest discussion about why so many audits are failing and
what the solution might be.
The NYSSCPA
is working hard to do its part. President David Lifson has appointed
a task force to study the IG’s report and develop recommendations
and a position for the Society’s board of directors. Task
force members were chosen from four of the Society’s most
active technical committees—Government Accounting and Auditing,
Public Schools, Not-for-Profit Organizations, and Health Care—and
are among the most knowledgeable people in the state regarding
government accounting and auditing. With the task force’s
help, the Society hopes to be part of the solution, not the problem.
For more
information on the report of the Inspectors General, or to download
the report, visit the PCIE website at www.ignet.gov.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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