Themes of the Yellow Book
February 2009
During the 2008 presidential campaign I saw an interesting graphic in USA Today. A linguist had created a map of the words that Hillary Clinton and Barack Obama used during their campaign speeches. The more frequently the word was used, the bigger it was on the map. Less frequently used words were smaller and filler or less meaningful words were not on the map at all.
What was the huge word on Obama's map? Change. And Hillary's? (You don't even remember her campaign, do you?  ) Her jumbo, frequently used word was "experience." "Change" did show up on her map—but it was smaller than her favorite word "experience."
I liked that map so much that I set out to create one for the Yellow Book. I was going to take the words from the Yellow Book and count how many times they showed up and then use that map to teach with. I got VERY bored with that task very quickly. So, I decided that since no one else would go through that trouble either, I came up with the following frequently used words or themes of the Yellow Book off the top of my head.
These themes, these concepts that crop up frequently in the text of the Yellow Book, help explain why the GAO takes the stands that it does on a variety of controversial topics. David Walker, who until recently led the GAO, was proud that the Yellow Book was the toughest set of auditing standards in existence.
- Accountability—the GAO likes this word so much that they changed the meaning of their acronym GAO from General Accounting Office to Government Accountability Office. Pretty slick, eh?
I have heard the term accountability tossed around the government so much I never even thought about what it meant. Now I know that accountability doesn't mean that you got it right—just that you take ownership of it.
I met a cowboy auditor in West Texas who said, "You might be right or you might be wrong, but you'd better the hell document it." That sums up accountability quite nicely. When things go bad, you are there to say, "Yes, that was me. I'm sorry." When things go well, you can keep your job.
Today on the news I saw a high school coach on CNN who was responsible for the death of one of his teenaged football players. And instead of being contrite, he said something like, "Everyone is forgetting that I suffered a loss, too and that I will hold on to this for the rest of my life." That isn't exactly what the parents of that boy want to hear—he was deflecting accountability and trying to engender empathy for his situation. I doubt that will serve him well in his community.
I enjoyed seeing the movie Frost/Nixon recently. Nixon believed that it when the president breaks a law, he isn't breaking a law. And then he said that he was aware that not everyone agreed with him on that point. Right….
The GAO reminds us over and over that we are accountable for our actions to the taxpaying public and that we as auditors have a role in holding government leaders accountable.
1.02 The concept of accountability for use of public resources and government authority is key to our nation's governing processes. Government officials entrusted with public resources are responsible
for carrying out public functions legally, effectively, fficiently,economically, ethically, and equitably.
One of the tough things about the GAO standards is they are not written for government officials (although government officials are mentioned a few times); they are written as standards for auditors. So while we are holding public officials and employees accountable for their actions, we are accountable for our actions, too.
In 2007, the GAO added tough language to chapter 1 telling us that we can't claim to be following Yellow Book standards in our audit reports unless we follow the "musts and shoulds" laid out in the standards.
1.11 When auditors are required to follow GAGAS or are representing to others that they followed GAGAS, they should follow all applicable GAGAS requirements and should refer to compliance with GAGAS in the auditors' report …
And if you don't follow a requirement, you must own up to it in the report by using a "modified GAGAS compliance statement" in your audit report.
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1.12 b. Modified GAGAS compliance statement: Stating either that (1) the auditor performed the audit or attestation engagement in accordance with GAGAS, except for specific applicable requirements that were not followed, or (2) because of the significance of the departure(s) from the requirements, the auditor was unable to and did not perform the audit or attestation engagement in accordance with GAGAS.
- Transparency—Actions and information that is transparent is open for everyone's inspection and review. And since we are spending the government's money as we are conducting these audits, we auditors also have to remain transparent!
One of the unique requirements of the Yellow Book for external auditors (read that as "CPA firms") must share their peer review report AND the letter of comments on the peer review report with those who pay for the audit. This goes beyond their responsibility to share our peer review results under AICPA standards. The AICPA requires that auditors share their peer review report—but not the letter of comment—with the public.
- Service—if you are auditing Hurst Construction, your ultimate audience for the audit report is Mr. Hurst, his board of directors, and the bank. If you are auditing a housing project—your ultimate client is not the managers of the project, the board of directors, or the bank. Your ultimate beneficiary of the report isn't even the grantor. The ultimate beneficiary of your work is the low-income children who live in the housing project. I got a little emotional on you, didn't I?
We have to remember, as governmental auditors, that we are checking to see if tax dollars are being used for their intended purpose and whether the public is being served by our auditee's efforts.
2.07 A distinguishing mark of an auditor is acceptance of responsibility to serve the public interest.
2.06 The public interest is defined as the collective well-being of the community of people and entities the auditors serve.
We hold our clients to a higher standard of behavior than we do in the commercial sector. While it was OK for AIG to go on a lavish spa junket before they were bailed out by US taxpayers, it certainly wasn't OK after the bailout. The GAO introduces a concept called "abuse" that you won't see in the AICPA standards.
4.12 Abuse involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate. Abuse does not necessarily involve fraud, violation of laws, regulations, or provisions of a contract or grant agreement.
The GAO goes on to ask us to let those in charge of governance know about abusive behavior. Again, this goes beyond the AICPA standards which do not even recognize the concept of abuse.
- Ethics—not every CPA in the country has to take ethics training. In Texas, we need four hours every two years. In California, they require eight hours every six years. In Wisconsin, they never have to take ethics training. Because of this disparity and the huge population of auditors who are not CPAs, the GAO added a chapter on ethics in 2003—just to remind us who we are supposed to be. The new ethics chapter is only five pages long and well worth a read. It is broken into five sections:
2.05 The ethical principles that guide the work of auditors who conduct audits in accordance with GAGAS are:
a. the public interest;
b. integrity;
c. objectivity;
d. proper use of government information, resources, and position; and:
e. professional behavior.
The ethics chapter sets the tone for the independence standards in chapter 3. The independence standards, although flawed, are tough. The ethics chapter points out that Independence is maintained through guarding your objectivity and credibility.
- Governance—this is the IIA's favorite word lately and it is closely related to the concept of accountability and transparency. In a governmental audit, the auditor must identify who is ultimately responsible for the subject that is being audited.
A1.06 Those charged with governance have the duty to oversee the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process, subject matter, or program under audit including related internal controls. In certain entities covered by GAGAS, those charged with governance also may be part of the entity's management. In some audit entities, multiple parties may be charged with governance, including oversight bodies, members or staff of legislative committees, boards of directors, audit committees, or parties contracting for the audit.
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External auditors are not allowed to let issues rest with the auditee—they must make sure that those in charge of governance are aware of what is going on. We do not assume that the client will report on their own fraud, abuse, or non-compliance...
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5.18 a. When entity management fails to satisfy legal or regulatory requirements to report such information to external parties specified in law or regulation, auditors should first communicate the failure to report such information to those charged with governance. If the audited entity still does not report this information to the specified external parties as soon as practicable after the auditors' communication with those charged with governance, then the auditors should report the information directly to the specified external parties.
- Professional judgment—this isn't really a theme—but it is a word that shows up frequently in all auditing standards. When we see it, it means we are on our own—the standards have taken us as far as we can go. For instance, check out this quote regarding working papers:
7.78 Auditors should design the form and content of audit documentation to meet the circumstances of the particular audit. The audit documentation constitutes the principal record of the work that the auditors have performed in accordance with standards and the conclusions that the auditors have reached. The quantity, type, and content of audit documentation are a matter of the auditors' professional judgment.
This means that the working papers can be bound, unbound, electronic, purple or spotted. The GAO is leaving those kinds of decisions up to you.
If you have any questions regarding any of this, please write to me. Or you might enjoy hearing the truth straight from the source—Michael Hrapsky at the GAO is a kind and helpful resource. You can reach him at yellowbook@gao.gov.
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Leita Hart-Fanta, CPA, CGFM
Resides in Austin, Texas and can be reached at www.auditskills.com
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© 2000 to 2010 Leita Hart-Fanta. All rights reserved. |