B-148144, JUN 30, 1976

B-148144, JUN 30, 1976

SUBJECT: QUALIFICATIONS OF PUBLIC ACCOUNTANTS ENGAGED TO PERFORM FINANCIAL AUDITS OF GOVERNMENTAL ORGANIZATIONS

HEADS OF FEDERAL DEPARTMENTS AND AGENCIES:

SEVERAL GOVERNMENTAL OFFICIALS HAVE RAISED QUESTIONS CONCERNING THE INTENT OF THE RECOMMENDATIONS SET FORTH IN OUR LETTER DATED MAY 28, 1975, TO SENATOR ABRAHAM A. RIBICOFF, CHAIRMAN OF THE COMMITTEE ON GOVERNMENT OPERATIONS. (COPY ENCLOSED.) IN THAT LETTER, WE RECOMMENDED THAT, WHEN PUBLIC ACCOUNTANTS ARE ENGAGED TO PERFORM FINANCIAL AUDITS OF GOVERNMENTAL ORGANIZATIONS LEADING TO THE EXPRESSION OF AN OPINION ON FINANCIAL STATEMENTS, THE AUDITS BE MADE BY CERTIFIED PUBLIC ACCOUNTANTS OR BY PUBLIC ACCOUNTANTS LICENSED BEFORE DECEMBER 31, 1970. SIMILAR RECOMMENDATIONS HAD BEEN MADE TO FEDERAL DEPARTMENT AND AGENCY HEADS ON SEPTEMBER 15, 1970. THIS LETTER IS INTENDED TO ADDRESS THE QUESTIONS OF WHETHER:

- OUR POSITION APPLIED TO ALL LEVELS OF GOVERNMENT INCLUDING STATE AND LOCAL AGENCIES WHEN THEY CONTRACT WITH PUBLIC ACCOUNTANTS FOR FINANCIAL AUDITS LEADING TO THE EXPRESSION OF AN OPINION,

- AUDITS OF FINANCIAL REPORTS AND/OR RECORDS OTHER THAN THE TRADITIONAL FINANCIAL STATEMENTS ARE COVERED BY OUR POSITION, AND

- IT IS THE INTENT OF OUR POSITION THAT ALL FINANCIAL AUDITS LEADING TO THE EXPRESSION OF AN OPINION BE MADE ONLY BY CERTIFIED PUBLIC ACCOUNTANTS OR PUBLIC ACCOUNTANTS LICENSED BEFORE DECEMBER 31, 1970.

IT WAS OUR INTENT THAT THE RECOMMENDATION CONCERNING CONTRACTING WITH PUBLIC ACCOUNTANTS TO MAKE FINANCIAL AUDITS LEADING TO THE EXPRESSION OF AN OPINION ON FINANCIAL STATEMENTS AND REPORTS WOULD APPLY TO ALL LEVELS OF GOVERNMENT. THE INCORPORATION OF THE POSITION CONCERNING QUALIFICATIONS OF PUBLIC ACCOUNTANTS IN "STANDARDS FOR AUDIT OF GOVERNMENTAL ORGANIZATIONS, PROGRAMS, ACTIVITIES & FUNCTIONS," ISSUED IN 1972, BROADENED THE RECOMMENDATIONS OF SEPTEMBER 15, 1970, TO APPLY TO ALL GOVERNMENTAL ORGANIZATIONS. OUR POSITION WAS ISSUED AS A RECOMMENDATION AND ITS INCLUSION IN THE STANDARDS DID NOT, PER SE, MAKE IT MANDATORY ON ANY GOVERNMENTAL ORGANIZATION. HOWEVER, THE STANDARDS WERE ESTABLISHED AS BASIC AUDIT CRITERIA FOR FEDERAL EXECUTIVE DEPARTMENTS AND AGENCIES BY FEDERAL MANAGEMENT CIRCULAR 73-2.

CONCERNING THE ISSUE OF WHETHER AUDITS MADE BY OUTSIDE PUBLIC ACCOUNTANTS OF FINANCIAL RECORDS OTHER THAN TRADITIONAL FINANCIAL STATEMENTS ARE COVERED BY OUR RECOMMENDATION, THE KEY POINT IS WHETHER THE PUBLIC ACCOUNTANT IS ASKED TO GIVE AN OPINION ON WHETHER FINANCIAL INFORMATION IS FAIRLY PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED OR OTHER APPLICABLE ACCOUNTING PRINCIPLES. IN GRANT REPORTING, THERE ARE MANY REPORTS THAT ARE NOT TRADITIONAL FINANCIAL STATEMENTS; FOR EXAMPLE, A STATEMENT SHOWING THAT MATCHING FUND REQUIREMENTS WERE MET, OR A STATEMENT OF ALLOWABLE COSTS. IF A PUBLIC ACCOUNTANT'S OPINION ON THE FAIRNESS OF SUCH A STATEMENT IS REQUIRED, THEN THE QUALIFICATIONS OF THE ACCOUNTANT SHOULD BE IN ACCORDANCE WITH OUR RECOMMENDATION.

THE THIRD ISSUE IS WHETHER IT WAS OUR INTENT TO RECOMMEND THAT ONLY PUBLIC ACCOUNTANTS PERFORM FINANCIAL AUDITS LEADING TO THE EXPRESSION OF AN OPINION ON THE FAIRNESS OF FINANCIAL INFORMATION. ON MARCH 31, 1976, THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS SENT MANY OF YOU A LETTER URGING THAT GREATER ATTENTION BE GIVEN TO THE SUBJECT OF AUDITOR QUALIFICATIONS, AND RECOMMENDING THAT SPECIFIC REFERENCE TO OUR POSITION ON AUDITOR QUALIFICATIONS BE INCORPORATED IN RULES AND REGULATIONS CONCERNING GUIDELINES FOR AUDITS OF FINANCIAL OPERATIONS. THE INSTITUTE ALSO RECOMMENDED A MODEL AUDIT PROVISION THAT MIGHT BE CONSIDERED IN FUTURE RULES AND REGULATIONS OR AUDIT GUIDELINES ISSUED BY A GOVERNMENTAL DEPARTMENT OR AGENCY.

OUR POSITION REGARDING THE INSTITUTE'S RECOMMENDED MODEL AUDIT PROVISION IS THAT IT WOULD BE APPROPRIATE FOR INCLUSION IN RULES AND REGULATIONS OR AUDIT GUIDELINES TO APPLY WHEN THE GOVERNMENTAL DEPARTMENT OR AGENCY CONSIDERS IT DESIRABLE OR NECESSARY TO SUPPLEMENT ITS OWN AUDITING CAPACITY BY ENGAGING PUBLIC ACCOUNTANTS TO PERFORM AUDITS LEADING TO AN EXPRESSION OF AN OPINION ON THE FAIRNESS OF FINANCIAL PRESENTATIONS. HOWEVER, THE INCLUSION OF SUCH A PROVISION SHOULD NOT BE WRITTEN SO AS TO PRECLUDE FEDERAL, STATE, OR LOCAL GOVERNMENT AUDITORS FROM CONDUCTING SUCH AUDITS BY UTILIZING THEIR OWN OR OTHER GOVERNMENT AUDIT STAFFS.

I HOPE THE ABOVE COMMENTS WILL CLARIFY THE POSITION STATED IN OUR LETTER OF MAY 28, 1975. IT SHOULD BE MENTIONED AGAIN THAT THE RECOMMENDATIONS WERE ADVISORY AND NOT MANDATORY. HOWEVER, FEW WILL DISPUTE THAT GOVERNMENTAL OPERATIONS INCLUDE MANY COMPLEX AND COMPLICATED FINANCIAL TRANSACTIONS. IT FOLLOWS, THEREFORE, THAT THE HIGHEST SKILLS ARE NEEDED TO AUDIT AND GIVE OPINIONS ON THESE OPERATIONS.