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Weekly UpdatesNo. 7: Auditors are not allowed to perform any task that would compromise their independence (you cannot be both judge and defense attorney). A government's independent auditors possess a wealth of experience and expertise that managers understandably wish to draw upon. Accordingly, auditors routinely provide clients with professional advice on a broad range of topics. All the same, auditors must refrain from placing themselves in the position of having to audit their own work, which would occur if they were to perform managerial tasks (e.g., approving payroll, making journal entries) or a special assignment whose work product fell within the scope of the audit (e.g., selection or implementation of general ledger software). Thus, the independent auditors are severely restricted in the types of non-audit work they may perform for a governmental client.
No. 8: Audit fees cannot be the principal factor in selecting an audit firm (you often get what you pay for). The quality of professional services will naturally vary with the professional that performs them. GAAP for state and local governments are substantially different from private-sector GAAP, just as public-sector auditing typically requires expertise well beyond GAAS (e.g., Government Auditing Standards, also known as the "Yellow Book" or generally accepted government auditing standards--GAGAS, and the Single Audit). Therefore, in the audit procurement process, it is essential that a government first determine whether a firm possesses the requisite expertise and experience to perform a quality audit before considering price. Unfortunately, it is easy for governments to allow price to trump all other considerations in the auditor selection process, which often has led to substandard audits. A substandard audit is not a bargain at any price.
No. 9: It is in the government's best interest to sign a multi-year audit contract (why pay more for the same thing?). In an initial audit of a set of financial statements, the new auditors must incur substantial costs to gain an understanding of and document the environment in which the government operates and its framework of internal control. In subsequent years, the auditor typically needs only to update that understanding and documentation. In a competitive, multi-year audit contract process, proposing audit firms can spread the initial cost over the entire term of the contract to arrive at the lowest possible bid. Conversely, if a government contracts for the financial statement audit only one year at a time, proposing firms must include the entire initial cost as part of the fee for that year or risk incurring a loss should the firm's contract not be renewed. Accordingly, the Government Finance Officers Association recommends that governments minimize potential audit costs by entering into multi-year audit contracts of no less than five years.
No. 10: Mandatory auditor rotation may pose special risks in the public sector (do not force yourself into a bad decision). Many people believe that periodically changing audit firms offers real advantages such as a fresh outlook and greater independence from management. Accordingly, many private-sector business enterprises and not-for-profits mandate that a new audit firm be selected periodically
The potential benefits of auditor rotation depend on the presence of a sufficient number of qualified firms being interested in performing the audit. Unfortunately, such is often not the case in the public sector, where the highly specialized character of governmental GAAP and governmental auditing standards often severely restrict the number of qualified firms in a given location. Accordingly, a policy of mandatory auditor rotation, when applied to state and local governments, could force a government into the position of hiring a less-than fully qualified replacement for its current independent auditor.
Given these facts, the best course of action for most governments is to mandate an aggressive procurement effort at the end of the audit contract to maximize the possibility for auditor rotation, without precluding the current audit firm from participating. Furthermore, many of the potential benefits of auditor rotation could be achieved by rotating the personnel assigned to the engagement within the current auditing firm.
CONCLUSIONS
There is no reason for the financial statement audit to remain a mystery for managers and others outside the auditing profession. Gaining a better understanding of the financial statement audit and the principles that underlie it should help all concerned to better cooperate toward the common goal of greater accountability.
STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.
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