Wiley Federal Government Auditing

Laws, Regulations, Standards, Practices, and Sarbanes-Oxley

Edward F. Kearney, Roldan Fernandez, Jeffrey W. Green, David M. Zavada

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118721865
• Edition: 2
• Topic: Business
• Subtopic: Governmental Accounting
• Index: Business

The most practical, authoritative guide to Federal Government auditing

Now in its second edition, Wiley Federal Government Auditing is authored by four CPAs who are partners at Kearney & Company, a CPA firm that specializes in providing auditing, accounting, and information technology services to the Federal Government. This single-source reference provides you with up-to-date information on applicable laws, regulations, and audit standards.

Created for both professionals and others performing Federal Government audits, this guide condenses the abundant, complex criteria for Federal Government auditing into concise, accessible topics you'll refer to frequently and presents:

• An easy-to-navigate format that allows you to find needed information quickly
• Detailed guidance on what, why, how, and by whom Federal audits should be made
• Discussion on internal control over Federal financial reporting
• Recent developments in auditing standards
• Federal financial statements, budgeting, accounting, and more
• Coverage of the scope and work required in an audit of Federal departments and agencies
• Examples of Federal audits
• Separate chapters devoted to auditing and evaluating Federal IT systems; performance audits; procurement and contract audits; and grant audits

Written in a non-technical style and complete with helpful exhibits, this guide is a "go-to" reference for government auditors, Inspectors General, public accountants, military comptrollers, legislators, state and local government auditors, budget offices, financial managers, and financial analysts. The content also applies to contractors and grantees, universities, and other nonprofits and organizations that have repeated financial dealings with the Federal Government.

PART I

BACKGROUND OF FEDERAL AUDITING

CHAPTER 1

BACKGROUND OF FEDERAL AUDITING

Evolution, Standard Setters, Responsibilities, Audit Types

The Federal Government’s spending for fiscal year (FY) 2011 was almost $3.8 trillion. The accumulated national debt (debt held by the public) was more than $10.2 trillion. Annual Federal outlays accounted for roughly 25 percent of the country’s gross domestic product (GDP) and debt held by the public is on an upward trend, now almost 70 percent of GDP. The Federal Government’s financial statements presented on an accrual basis reported gross cost of almost $4 trillion and total liabilities in excess of $17.5 trillion for and as of the end of FY 2011, respectively. Never before has there been a greater time for accountability, credibility, and reliability of financial information to inform discussion and decision making.1

The numbers just cited are dramatic and emphasize the massive size, influence, and commitments of the Federal Government. They are also indicative of a growing need to accurately and consistently account for the Federal Government’s financial activities. With so much at stake, accurately measuring and reporting the financial position and condition of the Federal Government has never been so important. The need for timely and reliable financial information to support budget and program management decisions is essential. The credibility of generally accepted accounting principles (GAAP) and audited financial statements is vital to government integrity, credibility, and maintaining confidence.

The Federal Government’s response to the U.S. financial crisis that began in 2008 demonstrated the magnitude of the government’s commitments and the underlying role the government plays in maintaining economic stability. From 2008 to 2010, the Federal Government assumed hundreds of billions of dollars in contingent liabilities to support government-sponsored enterprises, banking, financial services, and other industries to backstop financial markets and avoid further financial calamity.2

This chapter is being written at a time when the U.S. economy is still attempting to recover from the effects of that crisis and there is heightened awareness and interest in the financial condition and position of the U.S. government. Public debate and discussion of the long-term fiscal sustainability of spending and revenues at their current rates is increasing, and the President and Congress are engaged in budget discussions. External factors, such as the downgrading of U.S. debt ratings, highlight the need for credible financial management plans and transparent and reliable financial statements.

The Federal budget process is the primary management and accountability process in the Federal Government today. Budget formulation involves identifying policy and budget priorities along with funding justifications. Once enacted, budget execution tracks revenue and spending, primarily on a cash basis. The nature of the budget process subjects it to anecdotal analysis and political agendas, the pace of which has accelerated in the era of instantaneous communication and social media.

Federal accounting is intended to provide another perspective, a perspective that includes actual budgetary and accrual-based financial results, financial position, and condition. For some programs, such as social insurance programs like Medicare and Social Security, it also includes a view of longer-term fiscal sustainability. This view is supported by the credibility and integrity associated with transparent GAAP, generally accepted auditing standards (GAAS), and an annual independent financial audit. This chapter provides a detailed look at Federal auditing to better understand how it fits into the current management and accountability framework in place and the challenges ahead.

Audits of Federal Agency financial statements and programs play an important oversight role and add to the integrity and reliability of information reported. Most important, the oversight provided through independent audits, whether conducted by the Government Accountability Office (GAO) as an arm of the Congress, agency Inspectors General (IG), or independent Certified Public Accounting (CPA) firms, enhance accountability over Federal spending, stewardship, and program management. In essence, auditing is as essential to our government as the separation of powers itself.

AUDITING AND GOVERNMENT

The practice of auditing dates back millennia, with its roots more in the public sector than the private sector. Interestingly, these earlier audits were not merely fiscal or financial in nature but often addressed broader accountability, stewardship of assets, and legal compliance with respect to the receipts, disbursements, and uses of funds. Frequently, the sovereign or government’s assets, administered by agents, were the impetus for periodic audits. In America, however, it was the government’s Treasury and finances that were a concern to citizens and legislators. The priorities of colonial auditors closely paralleled those of today: conformance to budgets, completeness of reported receipts, appropriateness of expenditures, application or use of tax monies, and compliance with laws.3

Over the course of two centuries, the practices and ongoing problems of auditing perplexed many, confounded multitudes, and seemed to be the source of never-ending legal suits, trials, and judgments. No one had definitive views on what constituted an acceptable audit: not the Federal Government, courts, the public, or the accounting profession. Many attempts were made to set auditing standards and mandate specific auditing practices, and generally these promulgations were appropriate and applied. But, in many instances, when it was not possible to anticipate or provide for all of the circumstances and conditions that might be encountered in an audit, legislators, regulators, and standard setters told the auditor to “use judgment.” At times, the judgment exercised was in conflict with or was challenged by regulators, recipients, and other users of auditor reports. This was evident in the print and electronic media coverage of the 1990s and early 2000s reporting on numerous accounting, financial, and audit inadequacies. In many instances, the contested audit practices involved publicly traded corporations. Reviews of court dockets and governmental administrative law courts disclose similar disputes involving the Federal and other governments.

Standards for audits of Federal entities are similar to those applied in audits of private sector organizations. Like private sector audits, Federal audits must satisfy several constituencies: legislative overseers, Federal regulatory agencies, the rules of other Federal departments, and a host of accounting and auditing standard developers. The result is that the practice of Federal auditing must conform to a patchwork of laws, regulations, rules, customs, and practices, enunciated by a patchwork of congressional committees, governmental agencies, offices, and boards, and nongovernmental groups.

AUDITING THE FEDERAL GOVERNMENT: DEFINITION AND SCOPE

In the 1970s, the U.S. General Accounting Office4 declared that audits of government needed to be more comprehensive and would require, if not entirely different audit standards, then the application of additional standards. These standards would address issues, beyond the financial, important to accountability in the Federal Government and by governments, organizations, entities, and others involved with, or benefiting from, Federal financial assistance. Thus, GAO issued generally accepted auditing standards for government entitled the Government Auditing Standards (informally referred to as the Yellow Book). The Yellow Book defined an audit as:

A term used to describe, not only work done by accountants in examining financial statements, but also work done in reviewing (1) compliance with laws and regulations, (2) economy and efficiency operations, and (3) effectiveness in achieving program results. The objective of such an examination includes an expression of the fairness of presentation of an entity’s financial statements, but additionally a reporting, or an audit opinion if sufficient audit work was performed, on the nature of tests made and results of those tests with respect to an entity’s system of internal controls and its compliance with laws and regulations and provisions of contract and grant agreements.

The focus of Federal audits includes not only audits of an organization’s financial statements, but may include concurrent assessments and attestations relating to an organization’s performance, management, compliance with laws and regulations, and effectiveness of financial controls. The premise is that financial statement audits are important and will continue to be so, but audits of only financial data, as of a specific point in time, provide limited information as to whether an organization is economical or efficient, or if its operations even approach operational objectives defined in enabling legislation.

In the most recent edition of Government Auditing Standards (December 2011; effective for financial audits and attestation engagements for periods ending on or after December 15, 2012, and for performance audits beginning on or after December 15, 2011), the current Comptroller General declares:

Audits provide essential accountability and transparency over government programs. Given the current challenges facing governments and their programs, the oversight provided through auditing is more critical than ever.

Beginning in the mid-1980s, congressional interest, special investigations, hearings, and new laws created significant audit opportunities for more and better audits of Federal activities. By the late 1990s, the significance of governmental auditing increased and the number of governments undergoing annual audits rose enormously. These laws mandated better audits: audits that focused on the broader issues of Federal Government, were more informative and of greater use to Congress and executive managers, and provided financial and operational perspectives to Federal overseers.

Auditing and accounting professionals from various groups are involved with auditing and reporting on the activities of the Federal Government. Although many of these professionals are employed by the government, many others are employed by independent CPA firms to conduct audits under contracts from Federal Agencies. The practice of Federal auditing encompasses Federal Agency systems, internal controls, accounting, and financial statements required by Federal laws and government regulations as well as the entities receiving Federal financial assistance programs in whatever form (e.g., Federal subsidies; contracts and grants; loan and loan guarantees; settlement overruns and overhead disputes; and resolution of allowable, unallowable costs, and indirect cost issues).

Audits of all types have played, and will continue to play, a valuable role in the oversight and management improvement of government programs. Unlike most private sector audits where assurance over financial statements is the primary objective, in government, many Federal Government audits are undertaken when a problem is suspected or a risk level is elevated. In Federa...