GAO debates new auditing rules for agencies

After Congress enacted the 2002 Sarbanes-Oxley Act, the Government Accountability Office was left with a question: Should it change auditing standards for the government?

GAO's Advisory Council on Government Auditing Standards, a group of auditing experts from the public and private sectors, met Monday to debate that proposition. GAO sets governmentwide auditing standards through the Yellow Book, which was last updated in 2003, and is considering changes for its next revision.

"It started to look like there was a risk of everyone going off in their own direction and that would not have been good at all for the profession," said Jeanette Franzel, director of Financial Management and Assurance at GAO. Audits, she said, should follow certain standards, regardless of whether the auditor is examining a publicly traded company, a nonprofit, or a government entity.

One of the most hotly contested issues Monday was whether government agency auditors should report on internal controls, which are designed to prevent fraud and misreporting in financial statements. Sarbanes-Oxley requires auditors of publicly traded companies to issue reports on internal controls, but the Yellow Book does not require the same of auditors reviewing government entities.

While such reporting requires extra resources and costs, it can also reveal weaknesses in accounting policy. GAO proposed requiring auditor reports on internal controls only for "major public entities," which Franzel admitted is difficult to define.

Government agencies "don't have market discipline so [they] should take internal controls more seriously. Internal controls should be the rule unless an agency can justify an exception," said Ehsan Feroz, council member and professor of accounting at the University of Minnesota-Duluth.

Other council members said the current Yellow Book standards were adequate. "We feel like there are a lot of controls already. It feels like we're just making changes to be like someone else," said Nikki Tinsley, inspector general for the Environmental Protection Agency.

Monday's debate brought to light the differences between the public and private sectors and whether accounting standards should reflect those differences. Feroz suggested that public agencies require greater oversight, because voters express their opinions once every four years, while shareholders of public companies can quickly take their money out of the stock market.

Current accounting rules already reflect those differences, said Mike Hettinger, staff director of the House Government Reform Subcommittee on Government Efficiency and Financial Management, in an interview with Government Executive. "There are more rules in place for federal agencies today than in the private sector," he said. Prior to Sarbanes-Oxley, publicly held companies faced little oversight, he added.

Given the many existing regulations for government entities, he said, there is no need for a governmentwide requirement of internal control audits: "If [current] laws are enforced, I don't think we need to go down that direction."