by John M. Covaleski
Peoria, Ill. -- New federal government restrictions on the non-attest services that firms can provide to their government-sector audit clients are forcing some firms to ask the following question: Are we auditors or consultants?
The new rules that the U.S. General Accounting Office has set for generally accepted government audit standards, as applied in the "yellow book" audits of government entities and some federally funded non-government clients, prohibit auditors, in working with those clients, from also performing management functions or making management decisions, and from providing non-audit services in which the amounts involved are "significant" or the work is "material to the audit."
The provisions, effective on all audits for periods beginning on or after Jan. 1, have forced firms to re-evaluate clients to whom they are providing both audit and non-attest services. While some firms are going client by client in deciding whether to continue the audit or the non-audit relationship, others are taking a general philosophical approach.
"When it comes to giving up the audit work or the consulting, we are leaning toward preserving the audit relationship," said Mickey Scheffki, technology consulting director with national CPA firm Clifton Gunderson, of Peoria, Ill. She noted that the firm will likely refer tech work now being done for a "large, long-time" GAGAS client and, in its future dealings with GAGAS clients, it will "steer clear" of any services that could conflict with the new rules.
"Going forward, firms like ours will need to attract people who will be dedicated to doing only audit work, and to attract that talent we will have to show that we are not looking at audits as just a loss leader business," Scheffki said.
Clifton Gunderson, one of the country’s 20 largest firms, with more than $100 million in annual revenue, also ranks among the industry’s largest consulting operations. Its technology consulting alone generated $12 million in revenue in 2002.
Tom C. Davis, president of the T.C. Davis Associates CPA firm in Valdosta, Ga., has ceased doing "yellow book" audits of industrial development authorities in order to continue performing technology and other non-audit services for them. Asked why he dropped audits, he replied, "Because the other services is where the money’s at."
Davis’ 20-person firm has about 12 industrial development authority clients. Its technology services for that market include hardware-software integration and building systems that track work processes.
Firms around the country are reviewing their yellow book clients case by case, and in many instances letting the client decide whether to retain the firm for consulting or audit work. In most cases, CPA firms are reporting very little overlap of services that could result in violations of the new GAO rule.
For example, Finley & Cook, a 65-person CPA firm in Shawnee, Okla., has some 125 government-sector clients in its IT practice, but only six of those also receive audit services.
"We are asking clients to decide which way to go after we tell them that we cannot do both audits and consulting," said Linda O’Neal, manager of the firm. "And most are choosing to find a new auditor."
"For a lot of these clients, it’s easier to find a new auditor than it is to find technology consultants," said Greg B. Mullins, a partner with Potter & Co., a Lexington, Ky.-based CPA firm with about 30 government clients. The 60-person firm’s tech practice handles FundWare nonprofit accounting software from Intuit Inc.
Mullins noted that while most government entities would prefer shopping for a new auditor, one of his clients opted to keep Potter as its auditor after it hired IT staff to perform that work internally. He said that the client was confident it could handle the work internally, with support services for its FundWare accounting system provided by Intuit.
To be sure, very few CPA firms have already shuffled their service offerings in response to the GAO rules. Even though the rules are already in effect, there’s a general sense that many affected practitioners are not fully aware of them.
"We have gotten a lot of inquiries from accounting firms concerned about this, but they don’t appear ready to give up any work yet," said Jim Gifford, managing partner of NFP Accounting Technologies, Denver-based IT consultants and resellers. "They may be taking a wait-and-see attitude because there’s still a lot of confusion about this."
However, Gifford said his firm, which specializes in nonprofit and government-sector software, is poised to accept referrals from CPAs affected by the GAO rules.
Clifton Gunderson’s chief technology officer, Matt Camden, said his firm also is prepared for technology consulting referral work from CPAs affected by the rules, but noted, "That hasn’t happened yet, because this is all so new."
The rules also are ambiguous, particularly in tech consulting, one of the largest non-attest areas for many CPA firms. For example, Scheffki said that the rules allow audit firms to also provide tech training and to resell software if they present a wide enough selection of products.
Nonprofit industry software developers who use CPAs as resellers and consultants report that their sales channels have for the most part not reported problems with the new rules. "This has not been as much of an issue as we might have expected," said Jan Groth, director of public sector strategy for Intuit, which has some 75 resellers for its FundWare line. She said that many firms handling IT may have structured their organizations to meet the GAO rules long before the rules were established.
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