Public confidence in the integrity of the Government is indispensable to faith in democracy; and when we lose faith in the system, we have lost faith in everything we fight and spend for.
Adlai E. Stephenson Jr. (1900 – 1965)
The concept of accountability for public resources is key to our nation’s governing process and a critical element for a healthy democracy.
David Walker, cover letter to the 2003 Yellow Book
Trust in government in the U.S. has been declining for decades. Research shows that citizens’ trust in government is strongly correlated with their belief in whether “the democratic system is working.” Auditors have the potential to improve trust in government by contributing to accountability for effective, efficient, ethical, and equitable governance.
Government auditing standards shape our profession and the standards setting process is therefore central to our effectiveness in contributing to healthy democratic government. GAO’s promulgation of the first Yellow Book in 1972 marked our beginning as a real profession and began a steady elevation of the role of government auditing and our ability to contribute to democratic government, not only in the U.S., but throughout the world. The four revisions of the standards since have each marked an improvement by clarifying and strengthening the fundamental principles underlying government auditing and supporting the conceptual development of performance auditing. The 2006 Exposure Draft, however, is a step backward in several respects. I’ll highlight three of the problems.
First, despite staff efforts to clarify the text, the writing in the 2006 draft is worse than in previous revisions. This is not a minor issue. The standards must be written in clear, concise language for both practical and ethical reasons. Their utility to direct the day to day work of auditing is reduced if auditors cannot understand what is being asked of them. Experienced peer reviewers say that it is not at all uncommon during a review to find that competent veteran auditors on the peer review team struggle to interpret and apply the standards in fair and consistent ways. Ethically, the standards should serve an essential function in enabling the public, elected officials, and management to hold auditors accountable for doing work that meets the standards. That cannot happen unless the language is so clear and unambiguous that an informed layperson can read and understand what is being required of the auditors.
Second, changes to the performance auditing standards move away from their primary purpose. For example, it is widely accepted among government auditors that performance auditing should improve government operations and accountability. Indeed, GAO’s mission statement is “GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people.” Yet the idea of program improvement is not to be found in exposure draft. Instead, the performance audit section attempts to jam performance auditing into a financial audit framework of risk and materiality. In financial auditing the objective is clear and unchanging – to render an opinion on financial statements – and the auditor seeks to meet the objective while minimizing the risk of error. In performance auditing, where the possible objectives are many and varied, the auditor can minimize audit risk by simply focusing on easy questions. Focusing on easy questions doesn’t contribute to effective governance.
Finally, the change to peer review seems counterproductive. The 1988 addition of the peer review requirement to the standards contributed significantly to the development of government auditing as a profession. GAO had its first peer review of its performance audit practice in 2005 and apparently found the process difficult and time consuming. Now they suggest a five-year time frame instead of three years, contingent on meeting an elaborate set of conditions that only GAO and a few other large, bureaucratic audit organizations can meet. About three-quarters of ALGA members profess to follow GAGAS but only about a third have had a peer review. The process is difficult and time consuming. A five year period may be justified, and it fits with the theme of consistency with other standards since the IIA already has a five year period for its external quality review process, but GAO should be honest in proposing the change.
The fundamental problem with the standard setting process is that as it has evolved, GAO has tried to both set standards for the profession and respond to perceived problems in the industry, especially to regulate behavior of commercial auditing firms doing government audits. GAO has in effect put itself in the position of trying to be both the AICPA – setting professional standards, and the SEC – regulating an industry. Even casual observers of the world of audit recognize that these positions are difficult to reconcile. Indeed, the AICPA and the SEC were at war with each other during much of the last three decades. What government auditing needs is a standard setting process that looks a lot like that followed by GASB. Compared to the process for setting government auditing standards, the process for setting government accounting standards is much more rigorous and has much more due process. The GASB has a full-time chairman and part-time board members who focus solely on standard setting (the Comptroller General of the United States has other things to do in addition to setting government auditing standards) and a full time staff of experts conducting extensive research and analysis.
When the standards were first issued there were only a handful of real local government audit offices and no federal inspectors general. In large part because of GAO’s vision and leadership the world of government auditing has grown and strengthened. What worked in 1972 isn’t going to work now. I’m a huge admirer of David Walker. I think his leadership of the government auditing community has been superb, and I hope he will step up again. What needs to happen is this: the 2006 Exposure Draft should be shelved. We can continue under the 2003 version of GAGAS, which is pretty good. And Walker should convene some sort of strategic assessment of the future of government auditing to decide where to go from here.
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Funkhouser on Auditing