AICPA raises concerns about government yellow book proposal.

The American Institute of CPAs, commenting on the July 1993 exposure draft Government Auditing Standards, expressed concern about the added work and associated costs that would result from new requirements to test internal controls and compliance with laws and regulations.

The ED, which revises Government Auditing Standards (known as the yellow book), was prepared by the General Accounting Office (GAO) and the Government Auditing Standards Advisory Council (see "The New Yellow Book: Focus on Internal Controls," by Patrick McNamee, JofA, Oct.93, page 83). The yellow book requirements currently apply to an estimated 75,000 to 100,000 financial statement audits of federal, state and local governmental units and of not-for-profit organizations and other entities that receive federal assistance.

The comment letter, sent to the GAO by John B. Sullivan, chairman of the AICPA auditing standards board, and George A. Scott, chairman of the AICPA government accounting and auditing committee, provided recommendations and suggestions to help minimize confusion and misunderstanding in certain areas that could result from the proposal. The letter also said the AICPA was "pleased that the proposal simplifies some of the current reporting requirements."

More work for auditors. "It's an attempt by the GAO to clarify some of the developments that have occurred since the yellow book's 1988 revision," Scott told the Journal. "However, this draft goes well beyond field-work requirements that currently are in place and represents a substantial expansion of work for auditors, especially in the area of internal controls and compliance." Unlike the 1988 yellow book's, the ED's standards differ significantly from generally accepted auditing standards, Scott said, especially those for assessing internal controls.

Scott added that a primary concern is the expansion of yellow book requirements to audits of not-for-profit organizations and for-profit companies that receive even limited support from the federal government. As the comment letter noted, "The additional standards would expand the auditor's responsibility for testing the control environment and safeguarding assets relative to the entire entity, not just federal funds." Scott concluded, "In the long run, this may be self-defeating, as smaller entities decide the additional audit cost does not justify, for example, participating in a federal loan program."

Moreover, it is not clear why and how the additional proposed standards should be applied. For example, among the unresolved issues raised by the proposal are questions such as whether, for a not-for-profit organization subject to the yellow book that has $30 million in revenue of which only $150,000 was received from the federal government, an auditor will be required to perform additional control testing on the entire entity's internal control structure.

Determining accountability. Similarly, questions about assessing internal controls were raised by a proposed standard requiring auditors to consider the materiality level and audit risk "in the context of providing public accountability." The AICPA commented that auditors simply could not be expected to assess a materiality level and threshold of acceptable audit risk in the context of providing public accountability because every assessment could be challenged.

Specific recommendations for changes in the proposal were included with the comments. "Because of the complexity of some of the issues," Scott said, "we've requested a meeting between representatives of the AICPA and the GAO to discuss our concerns and recommendations before the draft is finalized."