It is particularly ironic that just two days before the July 4th Independence celebrations, the Comptroller General of the United States, David M. Walker releases a document explaining the January 22, 2002 GAO amendment to the Government Auditing Standards,commonly known as "the Yellow Book."
The amendment deals with a broad range of auditor independence issues with the most significant change being the application of the independence standard when nonaudit and consulting services are also being performed for the audited entity by the auditor.
The guidance, which may be found at www.gao.gov/govaud/ybk01.htm, in question and answer format, is some 40 pages in length. In addition to the guidance, Walker announces there will be a delay in the effective date of the amendment and indicates there will be further changes. In the next update of Government Auditing Standards, modifications will be made regarding compliance with other ethics rules, external specialists working with auditors, and acknowledgement of certain activities of the auditor in the management representation letter.
The GAO wisely concluded that practitioners need more time to comply with the new standards. So, instead of being applicable to audits for periods beginning on or after October 1, 2002, it applies to periods beginning on or after January 1, 2003. Also nonaudit services that are completed prior to January 25. 2002 are exempt as well as nonaudit services that are performed under certain binding contracts entered into or initiated by June 30, 2002, provided the work is completed before June 30, 2003.
The guidance makes for some interesting reading. I got the impression that auditors will really have their work cut out for them complying with the new standards. Take for example the answer to question 11, which basically asks whether the provision that enunciates the permitted nonaudit services qualifies as a safe harbor from impairment of independence by the auditor. The answer is "No" shortly followed by "The facts and circumstance of each nonaudit service always needs to be considered in light of the two overarching principles and the substance over form doctrine. A similar answer was given on the use of firewall within the auditing firm. The guidance also goes into detail in many other areas including related entities doing nonaudit services and whether conducting of a review or compilation for the audited entity compromises independence.
So what does this all mean? No. 1 is that the CPA doing government audit work is subject to a whole new set of more restrictive rules. No. 2 is that the rules will likely directly impact a number of existing engagements. No. 3 is close attention will have to be paid to the work of related entities. No. 4 is all future engagements will have to be closely evaluated and monitored. No. 5 is that some cases, the accounting firm will have to pick between performing either auditing or consulting work for clients. I could go on, but I think you get the idea. All is not bad, as there might be a redistribution of some of the work. If an auditor cannot do consulting services for an entity, the opportunity opens up for another CPA firm to capture that consulting engagement. Let the fireworks begin!
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