Yellow Book Revisions

October 2003

Wow, the GAO has been busy these past few years! From 1994 to 2000 the Yellow Book was static, unchanging. But in the past few years, the GAO has made some major changes to the standards that government audits are conducted under.

Independence Spelled Out

Last year, partially as a response to the Enron debacle, the GAO revised the INDEPENDENCE standard contained in the Yellow Book.

Some audit firms, especially those firms auditing small governments and non-profits, are going to have to make a tough choice about the services they provide to their clients.

The revised Yellow Book prohibits auditors from both creating the books and records and auditing them. Now this, you might be saying to yourself, makes perfect sense. Without this basic separation, there is no objectivity. However, smaller clients may not have the sophistication necessary to create their own books and records and have relied on the auditors to handle all financial needs in the past.

Under the new standards, audit firms will have to choose which service they will offer—the audit service or the compilation service. They can’t do both.

I believe the authors of the Yellow Book have wanted to make this change for years, but because of negative feedback from the profession the GAO has backed off. Now, with several recent accounting scandals as proof, they can convincingly argue and require auditors to strengthen their independence.

Continuing Education Restricted to Audit Skills Only

This year one of the major changes is to the CPE standards. In the 1994 version of the Yellow Book auditors were required to take 80 hours of CPE every two years with 24 hours of that being related to the governmental environment or the specific auditing environment under audit. The standards were quite on the composition of the 80 hours. Now the standards require that the 80 hours enhance the auditing skills of the auditor. The direct quote is:

Sec. 3.45… at least 80 hours of CPE that directly enhance the auditor’s professional proficiency to perform auditors and/or attestation engagements.

Sec. 3.46 describes the CPE that would qualify for the 80 hours:

3.46 CPE may include a variety of topics that contribute to the auditor’s proficiency to perform audits or attestation engagements, such as developments in auditing standards and methodology, accounting principles, assessment of internal control, principles of management or supervision, information systems management, audit sampling, financial statement analysis, evaluation design, and data analysis. It may also include subjects related to specific fields of work, such as public administration, public policy and structure, industrial engineering, finance, economics, social sciences, and information technology.

Yes, it is broad, but it definitely doesn’t include estate planning or individual taxation as acceptable topics. I am sure more will be said on this subject soon, and when it is, I will let you know.

Bye, Bye Financial-Related Audits

And one more important change… the audit type entitled financial related audits has been changed to attestation engagements. Just so you are hip to the latest lingo. If you want to be audit cool—don’t use the term financial related audit anymore.