GAO Announces New Rules on Auditor Independence

As Congress continued its investigations and calls for reforms escalated in response to the Enron collapse, the General Accounting Office (GAO) found the time was right to take bold action. It decided to break ranks with the rest of the accounting profession and issue yet another independence standard with which auditors must comply.

Restrictions on Consulting

GAO’s new standard introduces significant changes. Most notably, it restricts the types of services that can be provided by auditors on engagements that must comply with Government Auditing Standards, commonly known as the “Yellow Book.” The Yellow Book gains its authority from legal statutes that apply to a wide range of government agencies and to entities receiving federal assistance or participating in federal programs.

The upshot is that auditors of defense contractors, such as Lockheed Martin and General Dynamics, as well as hospitals, health maintenance organizations and federal, state and local agencies must now come to grips with new restrictions on consulting services that take effect October 1, 2002. According to a GAO press release issued on January 25, 2002, the new standard for non-audit services is based on two overarching principles:

  • Auditors should not perform management functions or make management decisions.
  • Auditors should not audit their own work or provide non-audit services in situations where the amounts or services involved are material to the subject matter of the audit.

For non-audit services that do not violate the above principles, certain supplemental safeguards would have to be met.

Resulting Inconsistencies

The American Institute of CPAs (AICPA) opposed the GAO’s rules because they differ from existing standards, add to standards overload and create unfair hardships for smaller entities and their accounting firms. In addition to the GAO’s and AICPA’s standards, auditors must comply with independence rules released by the U.S. Securities and Exchange Commission (SEC) and standards set by the International Federation of Accountants (IFAC).

In announcing the GAO’s new standard, Comptroller General David M. Walker said, “It is our hope that the AICPA will raise its independence standards … to eliminate any inconsistency between the standard and their own standards.” The GAO’s press release and standard, Government Auditing Standards Amendment No. 3, Independence, are available for download at the GAO’s web site.

-Rosemary Schlank

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