Protecting the Tax Dollar
Focusing on the Quality of Federal Grant–Funded Audits

E-mail Story
Print Story
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


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices