The SAA requires state or local government officials submit to the appropriate Federal officials a corrective action plan for each control weakness or a statement describing why corrective action is not necessary. The Director of the Office of Management and Budget (OMB) is required by the SAA to designate Federal cognizant agencies for audits conducted in accordance with the Act. The cognizant agency is charged with the responsibilities of ensuring audits are conducted in a timely manner and in accordance with the requirements of the SAA and also for ensuring audit reports and corrective action plans are transmitted to the appropriate Federal officials (OMB Circular A-128, pp. 7-8).

Data Collection and Methodology

In this study, single audit reports on internal control were obtained for each of the first four reporting years under the SAA for a sample of city governments. The reports were used to determine the types of control weaknesses reported, and to examine the differences in the frequency of reported internal control weaknesses across the first four reporting years under the SAA. This study also examines the relationship between control weaknesses reported and the type of auditor.

The audit reports were obtained. from the Bureau of the Census, Department of Commerce in Washington, D.C., where the Single Audit Clearinghouse was established in 1985. The Clearinghouse was established to facilitate the tracking of governmental units subject to the requirements of the SAA. Single audit reports of all state and local governmental units subject to the SAA are collected at this Clearinghouse. A listing of cities with audit reports on file at the Bureau was obtained from the Clearinghouse and used to draw a random sample from the population of city governments in the U.S. The final sample was composed of 115 cities.

Audit reports were examined for each of the four years to determine 1) the number of MICW reported, 2) the types of MICW reported, and 3) the type of independent auditor reporting. Cities in the sample were classified into one of four auditor groups based on the following scheme: 1) cities that had audits conducted by large (one of the 30 largest) CPA firms, 2) cities that had audits conducted by small CPA firms, 3) cities that had audits conducted by state auditors, and 4) cities that changed auditors during the first four reporting years.

Of the 115 cities in the sample, 16 of the audits were conducted by large CPA firms, 69 audits were conducted by small CPA firms, and 16 audits were conducted by state auditors, and 14 cities changed auditors at least once during the four-year period.

TABLE1

TYPESOFWEAKNESSESREPORTEDBYAUDITORS

Year1Year2Year3Year4Total

LargeCPAFirms(n=16)774927

SmallCPAfirms(n=69)17211910094485

StateAuditors(n=16)653216

CitiesChangingAuditors(n=14)2117101159

TOTAL206148117116587

Results by Type

Table 1 shows the number of MICW reported by type over the four-year period for each auditor group. The frequency of reported weaknesses decreased from Year 1 to Year 2 by 58 weaknesses (28%), decreased from Year 2 to Year 3 by 31 weaknesses (21%) and decreased from Year 3 to Year 4 by 1 weakness (1%). Over the four-year period, the frequency of MICW reported decreased by 90 weaknesses or 44%.

As to the frequency of MICW reported by each auditor group, Table 2 shows that small CPA firms reported, on the average, the greatest number of MICW, while state auditors reported the least. With the exception of large CPA finns, there was a significant decline in the number of weaknesses reported for all auditor groups. The frequency of MICW reported by small CPA firms, and state auditors, decreased by 45%, and 67% respectively, while reported weaknesses increased by 29% for large CPA firms. Reported weaknesses also declined by 48% in those cities that changed auditors during the four-year period.

Table 1 also examines the types of MICW reported. In each of the four years, control weaknesses related to financial management were most common. The categories financial management, property management, and cash management accounted for over 50% of the weaknesses reported each year.

It is interesting to note that in each of the first four years, a large number of cities had no reported control weaknesses. Table 2 reports the extent to which each auditor group reported MICW over the four-year period. Each audit was categorized into one of the three groups based on the number of reported MICW. A significant number of auditors reported no MICW in each of the first four years. Of the 115 audits conducted in Year 1, 63 auditors (55%) reported no MICW. In Year 2 there were 72 such audits (63%), 76 (66%) in Year 3, and 77 (67%) in Year 4. Thus, in over 50% of the audits conducted, auditors reported no MICW in any of the first four annual single audits. On the average, auditors of those cities that changed auditors during the four year-period reported control weaknesses most often, while state auditors reported the least often.

TABLE2FREQUENCYOFAUDITORSREPORTINGMICW

NoBetween1and5Greater

thanWeaknessesWeaknesses5

WeaknessesReportedReported

Reported

Year1:

LargeCPAFirms(n=16)11(69%)5(31%)0(0%)

SmallCPAFirms(n=69)34(49%)25(36%)10(15%)

StateAuditors(n=16)11(69%)5(31%)0(0%)

CitiesChangingAuditors(n=14)7(50%)6(43%)1(7%)

TOTAL(n=115)63(55%)41(36%)11(9%)

Year2:

LargeCPAFirms(n=16)12(75%)4(25%)0(0%)

SmallCPAFirms(n=69)40(58%)21(30%)8(12%)

StateAuditors(n=16)13(81%)3(19%)0(0%)

CitiesChangingAuditors(n=14)7(50%)6(43%)1(7%)

TOTAL(n=115)72(63%)34(30%)9(8%)

Year3:

LargeCPAFirms(n=16)12(75%)4(25%)0(0%)

SmallCPAFirms(n=69)42(61%)23(33%)4(6%)

StateAuditors(n=16)14(88%)2(13%)0(0%)

CitiesChangingAuditors(n=14)8(57%)6(43%)0(0%)

TOTAL(n=115)76(66%)35(30%)4(3%)

Year4:

LargeCPAFirms(n=16)12(75%)3(19%)1(6%)

SmallCPAFirms(n=69)43(62%)23(33%)3(4%)

StateAuditors(n=16)14(88%)2(13%)0(0%)

CitiesChangingAuditors(n=14)8(57%)6(43%)0(0%)

TOTAL(n=115)77(67%)34(30%)4(3%)

Discussion and Implications of Findings

The findings of this study were presented and discussed with a number of governmental auditors. Personal and telephone interviews were conducted with both state auditors and managers and partners in large and small CPA firms. Their comments were used to help assess and explain the research findings described in this study. The results of this study reveal two important findings. First, there is some evidence to suggest that financial management in cities improved over the first four reporting years under the SAA. Second, there were significant differences in the frequency of reported weaknesses related to the type of auditor over this period. These findings have a number of important implications.

No attempt was made to assess control structures in city government prior to the SAA. It is, therefore, not possible to conclude from the findings that any improvement in the financial management systems of cities was the result of the SAA. However, improved financial management and internal control structures were certainly expected benefits of the SAA when it was first proposed. The significant decline in the frequency of reported MICW over the first four reporting years may very well have been the result of this legislation and an indication of improved financial management.

The results of this study may be unique to city governments. One state auditor indicated cities are typically organized and operated in a manner considerably different from that of other governmental units, which may make implementation of corrective action more likely.

The results of this study also revealed there were significant differences in the frequency of reported MICW related to the type of auditor. One possible reason for this difference between auditors may be related to the size of cities audited by each auditor group. Approximately 85% of the audits conducted by small CPA firms were of cities with a population of less than 10,000. Many small cities often have internal control structures that are inadequate. Small CPA firms reported considerably more control weaknesses than the other two auditor groups.

It is interesting to note, however, that there was a significant number of cases in this study where auditors reported no MICW in any of the four years.

Editor's Note: The SAA and OMB Circular A-128 were written before SAS 55, Consideration of the Internal Control Structure in a Financial Statement Audit, became effective. Therefore the language used to describe the auditor's work related to internal control does not reflect the concepts introduced by SAS 55. Auditors should refer to the Audit and Accounting Guide, Audits of State and Local Governmental Units, for the current approach to satisfying the SAA and OMB A-128 requirements with regard to internal control.

Stephen T. Jakubowski, PhD, CPA, is associate professor of accounting, King's College, Wilkes-Barre, Pennsylvania.