The GAO cares about the quality and transparency of the audit report. The AICPA doesn’t.
How do I know? Because the Yellow Book, and not the AICPA:
- requires that auditors use the five elements of a finding to develop the most compelling argument possible.
- requires that the client get a chance to respond to our findings and that the response be included in the report.
- includes brilliant report quality guidance
1. The AICPA shuns the 5 elements
This finding is A-OK under AICPA standards:
Internal controls over cash are weak. We recommend that internal controls be strengthened.
No transparency there. A reader has no idea what control is weak, why it matters, how it happened, who is involved, or what, specifically should be done to fix it.
Several CPA firm partners have admitted to me that they have been counseled by their lawyers or experts in the audit industry to be purposely vague in their audit reports. Why? Because, if they are transparent and specific, they might get sued.
The AICPA standards don’t allow the auditor to choose the wording of the opinion letters. The AICPA requires auditors to use canned language (obviously written by and for an attorney) that barely makes sense to even a seasoned accountant.
This flies against everything the Yellow Book stands for. The GAO isn’t encouraging auditors to hide stuff. They say in the third sentence of the Yellow Book, “Auditing is essential to the nation’s governing process.” And then shortly thereafter says, “Engagements conducted in accordance with GAGAS provide information used for oversight, accountability, transparency, and improvements of government programs and operations.” Does it sound like they are trying to hide something?
The 5 elements of a finding are where the GAO puts legs on the concept of transparency.
Under GAO standards, the same lame finding above would sound more like this:
The City has been bouncing checks and incurring monthly overdraft charges totaling $X for the past six months. This was caused when the accounting department stopped performing cash reconciliations in July. City policy 724 requires the city to perform cash reconciliations monthly. We recommend that the Comptroller of the city ensure that the accounting department perform monthly cash reconciliations in an effort to avoid overdrafts on the City’s cash accounts.
Much more transparent!
2. The AICPA doesn’t require clients to respond in writing
An AICPA audit report is one-sided. The auditor writes their opinion and findings and the auditee is assumed to accept the opinion and findings. We don’t know for sure, because the auditee has no voice in the audit report.
Under GAO standards, the client gets a chance to respond in writing. This increases the transparency of the audit report in two key ways. One, it allows the reader to find out whether the issues brought up by the auditor will be resolved. Secondly, it allows the auditee to speak out against the auditor, in case the auditor is off base.
3. The GAO includes audit quality guidance in the performance audit reporting chapter
I know the AICPA doesn’t care about audit transparency because while researching the topic “user-friendly reports” in the late 90s, I ran across an article in the Journal of Accountancy that summarized a recent meeting of the members. And the members at the meeting decided, “We do not believe that audit reports and financial statements should be user-friendly.”
The AICPA, purposely or not, has created a culture of vagueness and poor communication of audit results. Even their own literature is obscure. Some of the sentences in the SASs will give you fits because they are seven lines long; they circle back on each other and repeat themselves.
The GAO is different. They actually want the Yellow Book to be understandable and clear. They may not hit the mark every time, but they try. Every time they revise the document, they make it better somehow.
And to top it all off, the GAO has this guidance in the performance audit reporting chapter regarding audit quality:
9.17 The auditor may use the report quality elements of accurate, objective, complete, convincing, clear, concise, and timely when developing and writing the audit report as the subject permits.
- Accurate: An accurate report is supported by sufficient, appropriate evidence with key facts, figures, and findings being traceable to the audit evidence. Reports that are fact-based, with a clear statement of sources, methods, and assumptions so that report users can judge how much weight to give the evidence reported, assist in achieving accuracy. Disclosing data limitations and other disclosures also contribute to producing more accurate audit reports. Reports also are more accurate when the findings are presented in the broader context of the issue. One way to help the audit organization prepare accurate audit reports is to use a quality control process such as referencing. Referencing is a process in which an experienced auditor who is independent of the audit checks that statements of facts, figures, and dates are correctly reported; the findings are adequately supported by the evidence in the audit documentation; and the conclusions and recommendations flow logically from the evidence.
- Objective: Objective means that the presentation of the report is balanced in content and tone. A report’s credibility is significantly enhanced when it presents evidence in an unbiased manner and in the proper context. This means presenting the audit results impartially and fairly. The tone of reports may encourage decision makers to act on the auditors’ findings and recommendations. This balanced tone can be achieved when reports present sufficient, appropriate evidence to support conclusions while refraining from using adjectives or adverbs that characterize evidence in a way that implies criticism or unsupported conclusions. The objectivity of audit reports is enhanced when the report explicitly states the source of the evidence and the assumptions used in the analysis. The report may recognize the positive aspects of the program reviewed if applicable to the audit objectives. Inclusion of positive program aspects may lead to improved performance by other government organizations that read the report. Audit reports are more objective when they demonstrate that the work has been performed by professional, unbiased, independent, and knowledgeable personnel.
- Complete: Being complete means that the report contains sufficient, appropriate evidence needed to satisfy the audit objectives and promote an understanding of the matters reported. It also means the report states evidence and findings without omission of significant relevant information related to the audit objectives. Providing report users with an understanding means providing perspective on the extent and significance of reported findings, such as the frequency of occurrence relative to the number of cases or transactions tested and the relationship of the findings to the entity’s operations. Being complete also means clearly stating what was and was not done and explicitly describing data limitations, constraints imposed by restrictions on access to records, or other issues.
- Convincing: Being convincing means that the audit results are responsive to the audit objectives, that the findings are presented persuasively, and that the conclusions and recommendations flow logically from the facts presented. The validity of the findings, the reasonableness of the conclusions, and the benefit of implementing the recommendations are more convincing when supported by sufficient, appropriate evidence. Reports designed in this way can help focus the attention of responsible officials on the matters that warrant attention and can provide an incentive for taking corrective action.
Clear: Clarity means the report is easy for the intended user to read and understand. Preparing the report in language as clear and simple as the subject permits assists auditors in achieving this goal. Use of straightforward, nontechnical language is helpful to simplify presentation. Defining technical terms, abbreviations, and acronyms that are used in the report is also helpful. Auditors may use a highlights page or summary within the report to capture the report user’s attention and highlight the overall message. If a summary is used, it is helpful if it focuses on the audit objectives, summarizes the audit’s most significant findings and the report’s principal conclusions, and prepares users to anticipate the major recommendations. Logical organization of material and accuracy and precision in stating facts and in drawing conclusions assist in the report’s clarity and understandability. Effective use of titles and captions and topic sentences makes the report easier to read and understand. Visual aids (such as pictures, charts, graphs, and maps) may help clarify and summarize complex material.
- Concise: Being concise means that the report is no longer than necessary to convey and support the message. Extraneous detail detracts from a report and may even conceal the real message and confuse or distract the users. Although room exists for considerable judgment in determining the content of reports, those that are fact-based but concise are likely to achieve results.
- Timely: To be of maximum use, providing relevant evidence in time to respond to officials of the audited entity, legislative officials, and other users’ legitimate needs is the auditors’ goal. Likewise, the evidence provided in the report is more helpful if it is current. Therefore, the timely issuance of the report is an important reporting goal for auditors. During the audit, the auditors may provide interim reports of significant matters to appropriate entity and oversight officials. Such communication alerts officials to matters needing immediate attention and allows them to take corrective action before the final report is completed.
I use this list frequently in my classes to ground all the new ideas we have covered. I ask the participants what they are actively doing to make sure that their audit report has all of these qualities. It is always an interesting discussion.
So, as much as I appreciate the AICPA’s leadership in several key areas (such as risk assessment, quality control and fraud responsibilities), I know they have a long way to go with regarding the transparency in audit reports. But, based on my experience with them, that is not even on their agenda. Thankfully, for us taxpayers, transparency is high on the GAO’s agenda.
If you want to have that discussion with a group of like-minded professionals, please join me at the Audit Reporting Clinic in Austin in April.