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Audits will cost more with new guidelines.

New federal accounting requirements that focus on auditor independence and consulting services could drive up an audit's price tag for nonprofits that receive federal funding.

Those nonprofits will need to review their auditor relationship because of a U.S. General Accounting Office (GAO) amendment to its General Accounting Standards (GAS), a GAO official said.

"Not-for-profits are going to need to consider whether they can use the same auditor for some of the services they've provided in the past and provide audit services," said Marcia Buchanan, assistant director of GAS at the GAO. "What will change is that usually it's been one stop shopping."

The new requirements could increase audit prices because the scope of auditors' work can't be reduced because of non-audit (consulting) services previously performed, Buchanan said.

Auditors can't reduce the level of testing (determining the reliability and validity of the numbers and assertions being made by management) they do because of past non-auditing work, Buchanan said.

The changes will apply to all audits for periods beginning on or after October 1, 2002, according to the GAO. Revisions have gone through an extensive deliberative process over three years, according to a GAO statement.

In a separate matter, the spotlight of reforming accounting standards and disclosure requirements beam bright on the corporate world because of Enron, but any adopted reforms may diffuse to the nonprofit sector.

Congress has proposed several accounting reforms, said Ian MacKay, director of professional standards and services at the Washington, D.C. office of the American Institute of Certified Public Accountants (AICPA). None is meant to directly affect nonprofit organizations, but there could be unintended consequences for the sector, he said.

In some of the proposals the Financial Accounting Standards Board (FASB), that has the authority to set accounting standards, would be restructured or brought under some type of federal oversight, MacKay said. Any changes to oversight or funding sources of FASB could affect nonprofits, he said.

Edmund L. Jenkins, chairman of the FASB in Norwalk, Conn., cautioned Congress in a statement "that any legislation mandating particular actions or procedures by the FASB can compromise the very independence that the legislation seeks to enhance."

The FASB statement referenced two specific bills "The Investor Confidence in Public Accounting Act" introduced March 7, and "The Truth and Accountability in Accounting Act," introduced March 14. Under the first bill, FASB's funding would come solely from "fees and charges assessed against each issuer" and revenues from selling materials and publications produced by FASB, according to a FASB statement.

A spokesman with FASB said it's too early to tell whether proposed changes would affect nonprofits.

Janet Greenlee, an associate professor at the University of Dayton Department of Accounting, in Dayton, Ohio, believes the price of nonprofits' audits will increase as a result of independence issues firms may face.

Smaller nonprofits usually use the same firm for consulting services and for tax services, which generates more revenue for the audit firm, Greenlee said.

At least one nonprofit chief financial officer believes if legislation restricts accounting firms' business consulting and auditing services, auditing fees will jump.

"If all a firm does is perform audits that means that's their only way of making money, and they can't use the auditing engagement as a means of getting their foot in the door to gain your consulting business," said Randy Main, chief financial officer, of the Fred Hutchinson Cancer Research Center in Seattle. "Therefore, they have to make their money and their margins off the audits."

As for the GAO, standard nonprofits must keep in mind two overall principles: Auditors can't make management decisions or perform a management function.

Auditors can't audit their own work if that work is material or significant to the subject matter of the audit, Buchanan said. Safeguards break into three areas:

* The same people that provide the non-audit services can't provide the audit service;

* The scope of auditor work on an audit can't be reduced because of non-audit (consulting) services performed;

* There's more documentation required of consulting services auditors provide and ensuring that nonprofit management makes decisions associated with the services.

MacKay, of the AICPA, said questions remain with the final requirements but are mostly principle-based. A few questions are the definition of who an audit entity is, for example, if a nonprofit has many segments, and grandfathering.

Example of the latter: If a firm puts an accounting system in for a nonprofit, even an off-the-shelf general ledger package three years ago, does that mean for the current and future years the auditor isn't independent, MacKay asked.

The GAO is considering both questions, Buchanan said. The GAO will release a Q and A paper probably in mid-May to help clarify questions that sprout from the finalized standard, Buchanan said.

The standard is available at (Amendment Three, Independence) or by calling GAO's report distribution section at (202) 512-6000. The GAO is seeking comments and questions. Send them to:
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Author:Jones, Jeff
Publication:The Non-profit Times
Article Type:Brief Article
Geographic Code:1USA
Date:Apr 15, 2002
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