How to Report Yellow Book Findings

In this special episode of THE SAMPLE, Leita Hart-Fanta, CPA talks to Charles Hall, CPA about how to report Yellow Book findings.

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Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.

Transcript

In this special episode of The Sample, Leita talks to Charles Hall, CPA. Charles Hall has worked in CPA firms for most of his career and is an expert on AICPA standards. He is a clear and entertaining writer and offers several self-study courses through YellowBook-CPE.com. Charles has his own podcast and allowed us to use this footage on our side as well.

In this session, Charles and Leita talk about Yellow Book findings.

Charles Hall:

I’m Charles Hall and I’m with Leita Fanta. Today we’re going to talk about Yellow Book findings, something I struggle with. So, that’s why I’ve got Leita on my side today. She’s going to help straighten me out. But we’re going to look at, even though I’ve been doing this a long time, I still have problems with Yellow Book sometimes. Maybe you do as well.

Leita Hart-Fanta:

Yeah, findings are hard.

Charles Hall:

Yeah, if it’s plain vanilla, just a straight up clean report, no problem. But, if there’s control issues or noncompliance, then it can be a problem.

So, we’re going to look at findings, how to write correct findings for your Yellow Book. One of the issues that some people run into, like me sometimes, is the wording in the Yellow Book report. So, all I’ll say about that is go and look at the GAS and Single Audit Guide from AICPA. It’s got all the sample language there. Make sure you’re using the right report, the right example from there. But from here, I want Leita to take us down the path of what is a finding and how to create a right finding.

Leita Hart-Fanta:

So, when you finish an audit, you’ve got two deliverables, right? One is your opinion, or your conclusion, against your objective. Then you’re seeking that conclusion or opinion that they comply or that the financial statements look good. You’re going to find things that need to be brought to the attention of those in charge of governance or whoever’s reading your audit report. And we call those findings. Now, some of the teams I work with don’t like that word because it sounds a little like we purposely were trying to dig something up. But some call them observations, or patronizingly, we’ll call them opportunities for improvement.

Charles Hall:

Very good. I like that.

Leita Hart-Fanta:

You like that? Okay. So, findings has kind of a negative connotation, but that’s essentially what they are. They’re kind of like little complaints that we’re making that they’re not in compliance, that their controls are not adequate, that maybe there’s a potential for fraud that’s going on here. And, in government, we also care about abuse and waste of government resources. So, those are the kinds of things that would cause us to go, “You know what? We should probably say something about that in the audit report.”

And so, what the GAO does, because the GAO loves – and that’s the author of the Yellow Book – loves the concepts of transparency and accountability. They don’t just say there’s a problem and then just kind of leave it at that. They describe the problem in a lot of detail and that’s the elements of a finding.

There’s five elements to a finding. The first one is the condition, which tells us what the problem is, and then we have a recommendation that resolves a problem. And then the second element is an effect. This kind of sells the finding and tells the reader why this is important and why we brought it up and why it needs to be resolved. So, it’s kind of like a, well, it’s a sales. It’s kind of like convincing people that this needs to be taken care of. Then the cause is the reason that the condition happened.

The GAO counseled us in 2018 for the first time, and I was very happy to get it. Even though most of us that have worked with findings for a long time knew this, but they documented it that the cause of a finding is an internal control weakness. That’s the best cause. So, it’s not best to start the finding with an internal control weakness. It’s best that it is the cause instead. So, the condition would say you’re not in compliance or the children are not eligible to receive free lunch and the cause is you didn’t screen them. So, make the internal control the cause. And then we have to resolve the cause, too, with the second recommendation. You’ve brought up two problems so far. You need to take care of both of them. And then the criteria… Oh, you want to say something, Charles?

Charles Hall:

Well, sometimes I see noncompliance. I looked at a report this week and there was budgetary noncompliance. So, you had a violation of law as you just said. I agree. You wouldn’t have that violation if you had good internal controls. But sometimes I see people write a noncompliance item and they don’t talk about the internal control. Or, they talk about the internal control and they don’t talk about the noncompliance. In other words, they’ll say what the control problem is, but they don’t specify what the noncompliance is. So, it seems like the two should go together.

Leita Hart-Fanta:

They do. If you follow the GAO’s recommendation that the cause is an internal control weakness and you test. See, every statement you make in the finding has to be backed up with evidence. So, that’s a big problem that people kind of try to squish and vague these out and say things that aren’t really true. The effect is errors and irregularities could go undetected. That’s not true. That’s not backed up to the test.

Or, they don’t really know the cause. And they’ll say something like, “The client admitted they didn’t have enough time to take care of this, or was not aware of the issue.” Those aren’t really causes. Those aren’t something you can title a working paper. So, if you do start off with the condition that ‘the kids are not eligible for free lunch’ or whatever we’ve determined. I’m short cutting here because we’re on a short video. And the cause is ‘did not screen for eligibility.’ You can test that the kids weren’t eligible in the condition and you can test that the screening didn’t occur. And now you’ve backed up all your elements with evidence. Your effect would just be quantifying how many kids are not eligible out of your sample.

Charles Hall:

Once you’ve done this, when should I sit down with the client and how should I communicate this? I mean, should I have this conversation immediately? Or, maybe a day or two later? Or, three weeks later? When does this happen and who am I talking to?

Leita Hart-Fanta:

When you’re doing the single audit, you mean?

Charles Hall:

Well, just Yellow Book. Say we’re not doing single audit, but just Yellow Book, and I’ve run into a problem. Should I go ahead and have that conversation as soon as I’m aware of it? How do we communicate and when about the finding?

Leita Hart-Fanta:

Well, on the how to communicate, I think it’d be nice to say something. I think it’d be wise to say something like “We noticed that some of the kids that are getting free lunch are not eligible.” Hopefully they go, “Oh…” Then you go, “Do you think that’s a problem?” And they go, “Yeah, that’s probably a problem.” And then you say, “Well, what do you think? Do you think you’re going to do something about that?” And they’re going to go, “Yeah, we’ll probably need to do something about that.” Then you say, “Well, what are you going to do about it?” Then they say, “We’re going to have to screen for eligibility.” And there, they just wrote your finding for you. They came up with your cause for you and they came up with your recommendation for you.

If you let them shape the cure, it’ll get cured. If you tell them how to cure it, sometimes they rebel.

Charles Hall:

I like that. That’s like me trying to tell my children what they should or should not do. I need to let them tell me what they should or should not do.

Leita Hart-Fanta:

Yeah, you just kind of go, “Oh, is that causing you some kind of harm? You want to talk about what you could do about that?” And then let them come up with the solution. So, I don’t know. When do you talk to the client about this kind of stuff, Charles?

Charles Hall:

If I’m a younger staff member, I run it by who’s in charge. Somebody with more experience than me, first. Then usually that person would be the one having the communication. But I like how you did that step thing with the client. So, that’s diplomatic, is useful, helpful. It gets them to own it. Now, the example you were using, that can come into play really with single audit in just a financial statement audit. Because if you don’t meet certain criteria, you didn’t really earn the revenue for a grant. Sometimes these things affect financial statement and single audit. You want to go to the next slide?

Leita Hart-Fanta:

Yeah, sure, we can do that. So, what the elements of a finding does is it tells the story of the issue and they’re actually modeled after… gosh, I always forget if it’s Socratic or Aristotelian. It’s modeled after Greek philosophy. So, there are elements of a persuasive argument. The first thing that we always find is a condition, and it kind of tells us what is going on. Then the criteria is what should be. And then we find a gap which is represented by this triangle right here. Now, we could just leave it just like that. We could just say, “Your baby’s ugly. You did not meet the criteria.” Then just say, “Get your act together.” We could do it like that. But, to persuade people and to really be more helpful, we also identify, “Well, what caused this gap?”

So, how did this gap happen? And then we kind of say, “Well, this gap should be filled or closed because this matters.” And then we recommend that we resolve the condition and the cause.

A lot of auditors that I work with – I work with performance auditors a lot – they always say things like, “We want to tell a story in our audit report.” And I’m like, “Well, it’s already baked in. The story is already baked into the elements of a finding. You don’t have to make up a new fairytale. This is our story.” What auditors do is they evaluate a subject matter against a criteria, and identify why they don’t match and try to get them to match. Try to help the client get the gap closed.

So, that’s the underpinnings, I guess, of the elements of a finding. But it’s not as easy as it sounds. It’s really hard. So, I teach classes on this on a regular basis and everybody’s like, “Yeah, yeah, yeah.” And they nod and they go, “Sure, I got it. I know what it is.” But, when I give them a scenario and I ask them to go apply it, they’re like, “Oh, yeah. That effect is hard to come up with. Oh, yeah. That cause is hard to come up with.” A solid recommendation that we can go follow up on and audit later is really hard to come up with. And something that the client thinks is feasible and that they’ll do. It’s harder than it looks on paper.

Charles Hall:

I think so. The mistake I see a lot of people make is they default to general language, not particulars. And you got to get down into the nitty gritty and you’ve got to really, in that recommendation, you’ve got to tell them in detail how to fix the problem. Then, if you have an issue and you’re going to report it, they want to know how to solve the problem.

Now, if you do Leita’s way and diplomatically, they give you a really good solution, then applaud them, thank them, write it down and say, “Hey, I think I’ll use that!” Then proceed.

So, we’ve got condition, criteria, cause, effect, and then there’s a recommendation. These are all elements in that finding in the schedule of findings and responses. Am I using the right name there? Yes. Okay. And by the way, you can embed a finding in the Yellow Book report. It’s usually better to say 2024-01 and then put it on the schedule. That way, if you got three or four findings, you don’t have this terribly long Yellow Book report. You got that addendum and the schedule, and that just usually works better.

Are there any closing thoughts?

Leita Hart-Fanta:

I would say please don’t make things up or forecast future doom. Actually do the testing that backs up each of those elements so that your credibility as an auditor will be preserved. So, don’t say things like… Back to your parents, right? “If you keep doing this, something bad’s going to happen to you.” That’s not good for your credibility. Just keep it factual. No emotions. Test everything you’re saying to back up everything you’re saying. And I think that’s the professional way to do it. That’s my closing thought.

Charles Hall:

And all good. And if we, as the auditor, can be friendly… I know we’ve got professional skepticism, but at the same time, we are there to help. So, little humility, little kindness as we do this. All that is really important.

Leita Hart-Fanta:

Don’t come up with the recommendations on your own because you’re not responsible for managing the entity.

Charles Hall:

That’s right. That’s right.

Leita Hart-Fanta:

Your job is just to say, “Hey, I saw this thing.”

Charles Hall:

Yeah. Then, “What can we do about it?”

Want to learn more about Yellow Book findings?

Want to learn more about this topic and earn some NASBA qualifying CPE at the same time, try How to Write an Audit Report Finding, which is a fun and short course that tackles the hardest aspects of writing a finding.

And that wraps it up for another episode of the Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me at leita@yellowbook-cpe.com and I’ll do my best to fill in the blanks. Thanks for playing.