GAO Update

Jim DalkinDirector

GAO/Financial Management and Assurance

American Accounting AssociationMarch 2, 2012

Page 1

GAO’s Mission

Our mission is to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people.

We provide Congress with timely information that is objective, fact-based, nonpartisan, non-ideological, fair, and balanced.

Page 2

GAO Teams

Page 3

Recent Reports and Testimonies

• More Efficient and Effective Government: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue; GAO-12-449T, Feb 28, 2012

• Airport and Airway Trust Fund: Factors Affecting Revenue Forecast Accuracy and Realizing Future FAA Expenditure; GAO-12-222, Jan 23, 2012

• Law Enforcement Body Armor: DOJ Could Enhance Grant Management Controls and Better Ensure Consistency in Grant Program Requirements; GAO-12-353, Feb 15, 2012

• Management Report: Improvements Are Needed in Internal Control over Financial Reporting for the Troubled Asset Relief Program; GAO-12-415R, Feb 13, 2012

Page 4

Financial Management and Assurance Team (FMA)• Serves as the financial audit “firm” for financial audits within

GAO

• Our main practice areas include:• Financial Audits• Performance Audits• Professional Standards • Auditing and Accounting Profession

Page 5

Financial Management and Assurance Team – Financial Audits• Financial Statement Audits performed by FMA

Consolidated Financial Statements of the U.S. Government Securities and Exchange Commission Troubled Asset Relief Program Internal Revenue Service Federal Deposit Insurance Corporation Bureau of Public Debt Federal Housing Finance Agency Consumer Financial Protection Bureau

Page 6

Financial Management and Assurance Team – Performance Audits• Recent performance audits performed by FMA

• Federal Grants: Improvements Needed in Oversight and Accountability Processes; GAO-11-773T, Jun 23, 2011

• Veterans Health Care: Monitoring Is Needed to Determine the Accuracy of Veteran Copayment Charges; GAO-11-795, Aug 29, 2011

• Inspectors General: Reporting on Independence, Effectiveness, and Expertise; GAO-11-770, Sep 21, 2011

• Deepwater Horizon Oil Spill: Actions Needed to Reduce Evolving but Uncertain Federal Financial Risks; GAO-12-86, Oct 24, 2011

Page 7

Financial Management and Assurance Team – Professional Standards• Generally Accepted Government Auditing Standards

(Yellow Book)• Standards built on the SASs issued by the Auditing Standards

Board of the AICPA.• GAO uses an extensive deliberative process including public

comments and input from the CG’s Advisory Council on Government Auditing Standards to accomplish general acceptance.

• Standards for Internal Control in the Federal Government (Green Book)

• GAO issues Standards for Internal Control in the Federal Government under the authority in FMFIA.

• Drafting update to Green Book, using COSO ED as a basis, developing additional sections for government, i.e. compliance.

Page 8

Financial Management and Assurance Team – Professional Standards (cont.)• FMA collaborates with ASB, PCAOB, AGA, INTOSAI, ISB, IAASB, IIA and

many others (including AAA)

• FMA provides input to other standard setters on proposed/updated guidance. Recent comment letters include:• PCAOB: Auditor Independence & Audit Firm Rotation• PCAOB: RE-Proposed Standard -- Communications with Audit

Committees• IPSASB: Long-Term Sustainability of a Public Sector Entity’s Finances• GASB: Economic Reporting: Financial Projections

Note: Our comment letters are posted on our website GAO.gov/commentletters

Page 9

High Profile Issues – Improper Payments

• Estimated $115.3 billion in Federal improper payments in fiscal year 2011

• The $115.3 billion estimate was attributable to 79 programs spread among 17 agencies.

• Ten programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported for fiscal year 2011.

• A 2011 reported decreases primarily related to three programs—• Department of Labor’s Unemployment Insurance program• Earned Income Tax Credit • Medicare Advantage program.

• For additional information see Improper Payments: Moving Forward with Government-wide Reduction Strategies; GAO-12-405T, Feb 7, 2012

Page 10

High Profile Issues – DoD Audit Readiness

• The Department of Defense (DOD) originally was scheduled to be auditable by 1997

• The National Defense Authorization Act of Fiscal Year 2010 mandated that DOD be audit-ready by September 30, 2017.

• DOD’s management challenges are commensurate with its size, complexity and system/data reliability

• While DOD's top management has demonstrated a commitment to transforming the department’s business operations and has initiated reforms to address long-standing weaknesses, significant inefficiencies remain.

Page 11

High Profile Issues – Audit Quality

• Federal government grants have risen substantially• From $7 billion in 1960 to almost $450 billion budgeted in 2007

• The single audit is an important mechanism of accountability

• OMB has proposed revisions including increasing the threshold for audit• As proposed under $1.0 million no Single Audit requirement• $1-3.0 million an audit and focused compliance procedures• Over $3.0 million full single audit

• Past study the Report on National Single Audit Sampling Project, (2007) • 51 percent having deficiencies severe enough to classify the audits as

limited in reliability or unacceptable. The report also recognized a need to review audit sampling.

• Limited current data on the effectiveness and quality of Single Audits. • Have efforts to improve audit quality by the profession been successful?

Page 12

High Profile Issues – Long Term Sustainability

• For FY 10-12, long-term fiscal projections are presented as Required Supplemental Information.

• SFFAS 36 requires a basic statement in the CFS subject to audit beginning FY 13. • Debt held by the public (as a percent of GDP)—

• Approximated 36 percent in 2007 • Approximated 62 percent in 2010

• The federal government’s fiscal outlook has improved since GAO’s last report, largely due to provisions in the Budget Control Act of 2011.1

• This Act requires at least $2.1 trillion in deficit reduction from 2012–2021. • Assumes the Act will not be repealed or modified

Page 13

1GAO, The Federal Government's Long-Term Fiscal Outlook: January 2011 Update (GAO-11-451SP, Mar. 18, 2011)

High Profile Issues – Long Term Sustainability (cont.)• Our simulations show that the Budget Control Act of 2011 will help reduce deficits. However, the

longer-term fiscal challenge remains.• Figure 1 presents debt held by the public under two fiscal policy simulations

Figure 1Source: GAO-12-28SP Long-Term Fiscal Outlook Fall 2011

Page 14

Statistics and Data

• GAO works with a variety of statistics and data sets• They are available for use by outside organizations on a case

by case basis but are protected by GAO to the extent that there are agreements in place to do so.

Page 15

2011 Yellow BookWhat You Need to Know

• Effective for financial audit periods ending on or after December 15, 2012

• Effective for attestation periods ending on or after December 15, 2012

• Effective for performance audits starting on or after December 15, 2011

• Independence may be impacted before the beginning of an engagement

16

17

17

Primary Yellow Book Changes• Updated independence

Included a conceptual framework• Added documentation requirements

Additional documentation in independenceFocus on non-audit services

• Focused on converging where practicalIncorporated clarified SASsFewer differences

• Made several revisions to details of the performance audit chapters

18

18

Independence

•Conceptual Framework Allows the auditor to assess unique

circumstances Adaptable Consistent with AICPA and IFAC frameworks

• Significant differences from ET-101-3 Entry point for use of the framework Emphasis on services “in aggregate” Documentation requirements

19

20

20

Applying the Framework

• New approach combines a conceptual framework with certain rules (prohibitions) Balances principle and rules based standards Serves as a hybrid framework

• Certain prohibitions remain Generally consistent with Rule 101 AICPA

• Beyond a prohibition Apply the conceptual framework Will be used more often than AICPA

20

21

Applying the Framework

Conceptual Framework:

1. Identify threats to independence

2. Evaluate the significance of the threats identified, both individually and in the aggregate

3. Apply safeguards as necessary to eliminate the threats or reduce them to an acceptable level

4. Evaluate whether the safeguard is effective

Documentation Requirement:

Para 3.24: When threats are not at an acceptable level and require application of safeguards, auditors should document the safeguards applied. 21

22

GAGAS Conceptual Framework for Independence

23

23

Applying the Framework: Categories of Threats

1. Management participation threat2. Self-review threat3. Bias threat4. Familiarity threat5. Undue influence threat 6. Self interest threat7. Structural threat

24

24

Routine Audit Services and Nonaudit Services

Routine audit services pertain directly to the audit and include:

• Providing advice related to an accounting matter• Researching and responding to an audited

entity’s technical questions• Providing advice on routine business matters• Educating the audited entity on technical

matters

Other services not directly related to the audit are considered nonaudit services

25

25

Defined Nonaudit Services

Services that are specifically identified as nonaudit services include:• Financial statement preparation• Bookkeeping services• Cash to accrual conversions (a form of bookkeeping)• Other services not directly related to the audit

26

Nonaudit Services

1. Determine if there is a specific prohibition. Unless specifically prohibited, nonaudit services MAY be permitted but should be documented.

2. If not prohibited, assess the nonaudit service’s impact on independence using the conceptual framework.

3. If the auditor assesses any identified threat to independence as higher than insignificant, assess the sufficiency of audited entity management’s skill, knowledge, and experience to oversee the nonaudit service.

And…

27

Nonaudit Services (Continued)

4. If the auditor concludes that performance of the nonaudit service will not impair independence, document assessments in relation to both:

• safeguards applied in accordance with the conceptual framework and

• the auditor’s assessment of sufficiency of audited entity managements’ skill, knowledge or experience to oversee the nonaudit service (paragraph 3.34).

28

28

Assessing Management’s Skill, Knowledge, or Experience• Factors to document include management’s:

Understanding of the nature of the nonaudit service Knowledge of the audited entity’s mission and operations General business knowledge Education Position at the audited entity

• Some factors may be given more weight than others

• GAGAS does not require that management have the ability to perform or reperform the service

29

29

SAS 125: Sample Language for GAGAS Report on ICFR and Compliance

“The purpose of this report is solely to describe the scope of our testing of internal control over financial reporting and compliance, and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control over financial reporting or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control over financial reporting and compliance. Accordingly, this report is not suitable for any other purpose.”

30

Where to Find the Yellow Book

• The Yellow Book is available on GAO’s website at:

www.gao.gov/yellowbook

• For technical assistance, contact us at:yellowbook@gao.govor call (202) 512-9535

30