Single Audits Found to be Deficient

by Sefton Boyars, CPA, CFS

Sefton Boyars, CPA, CGFM, CIA, CFS, retired in 1996 from a 35-year career as a government auditor and audit manager. He had been the Regional Inspector General for Audit for the U.S. Department of Education for 16 years at the time of his retirement. He currently teaches continuing education classes for many organizations, including federal, state and local governments, professional associations, the USDA Graduate School, and Management Concepts, Incorporated. He received AGA’s National Education and Training Award for 1998.

December 2007

On June 21, 2007, the President’s Council on Integrity and Efficiency released the “Report on National Single Audit Sampling Project.” Despite its innocuous name, the report contains important findings and recommendations.

The President’s Council on Integrity and Efficiency (PCIE) is comprised of the presidentially-appointed federal Inspectors General. It decided to test the quality of a statistical sample of single audits because of long-standing concerns that single audits were often deficient, particularly in the work on compliance.

In 2002, the House of Representatives held hearings on single audits. During those hearings, the Office of Management and Budget testified that several federal agencies had found many deficiencies when reviewing the quality of single audits. However, the agencies had not selected the audits on a statistical basis, and therefore could not reliably estimate the proportion of audits that were deficient.

The PCIE assembled a team of auditors from a number of federal Inspectors General to review a statistical sample of 208 single audits from the universe of all single audits submitted and accepted during the twelve months ended March 31, 2004. The PCIE invited some non-members to participate in the planning of the project and to conduct some of the quality reviews: three State Auditors and federal Inspector General who was not presidentially appointed.

The audit team reviewed the fieldwork and reporting relating to internal control over compliance and compliance with laws and regulations for selected major federal programs. They did not review the fieldwork and reporting of the general purpose financial reports.

The results were appalling. The report concluded that 35.5% of all single audits were unacceptable and an additional 16.0% were “of limited reliability.” Overall, just under one-half of the reports were estimated to be acceptable. Had the PCIE review also considered the audit quality of general-purpose financial statements, the results could have been even worse.

While the larger audits (those covering over $50 million in federal funds) fared somewhat better, those results were also well below what one would expect: 24.0% were unacceptable and an additional 12.5% were “of limited reliability.” Only 63.5% were considered acceptable.

There are some logical reasons why the larger audits would have had better, but still unacceptable, statistics. First, government auditors conducted a higher proportion of the larger audits, and government auditors performed higher quality compliance audit work than CPAs. That is not surprising, as government auditors are experienced in reviewing compliance with federal, state and local requirements. Second, the larger audits generally be performed by larger CPA firms, who had more experience in conducting Yellow Book audits.

The most prevalent deficiencies included:

• Not documenting the understanding of internal controls over compliance requirements [56.5% overall]
• Not documenting testing internal controls of at least some compliance requirements [61.0% overall]
• Not documenting compliance testing of at least some compliance requirements [59.6% overall]

The report recommended a three-pronged approach to dealing with this problem:

• Revise and improve single audit standards, criteria and guidance - Revise and improve standards, criteria and guidance applicable to single audits.
• Establish minimum requirements for training on performing single audits - Require comprehensive training on performing single audits as a prerequisite for conducting single audits and continuing professional education that provides current information on single audits as a prerequisite for continuing to perform single audits.
• Review and enhance processes to address unacceptable single audits - Review the suspension and debarment process to identify whether (and if so, how) it can be more efficiently and effectively applied to address unacceptable audits. Enter into dialogue with the AICPA and State Boards of Accountancy to identify and implement ways to further the quality of single audits and address the due professional care issues noted in this Project. Identify, review, and evaluate the potential effectiveness of other ways (existing or new) to address unacceptable audits.

The U.S. Senate held hearings on this report on October 25, 2007. Given the significance of the report findings and the attention that the report is generating, I expect that single audits will be under the microscope in the coming years. In particular, as the report was issued by the PCIE, federal Inspectors General may review single audits with greater scrutiny than they did previously.

You can access the full report at:

www.ignet.gov/pande/audit/NatSamProjRptFINAL2.pdf