GAO lays down the law: auditors of agencies can’t be consultants

Auditors who review federal agencies can no longer provide their clients with certain consulting services, according to new requirements in government auditing standards. The new rules, released Friday by the General Accounting Office, are designed to make sure auditors who review federal agencies do not perform management functions or make management decisions, GAO said. The rules expressly prohibit auditing organizations from providing bookkeeping, recordkeeping and payroll services. Auditors can continue to provide routine advice and answer technical questions, GAO said. Many state and local governments have adopted similar standards, according to GAO. Government auditing standards, which differ from the auditing standards for private firms, were first published in 1972 and cover federal agencies and organizations receiving federal money. The changes, which take effect Oct. 1, are designed to ensure integrity and objectivity in the federal auditing process, according to Comptroller General David Walker, who heads GAO. "The changes take a new approach to dealing with the issue of independence in auditing," Walker said. "Hopefully this will raise auditing standards in general." The activities banned by the new rule are permitted under the auditing standards of the American Institute of Certified Public Accountants (AICPA). Although the new standard has been in the works for three years, Friday's announcement arrived in the midst of the Enron scandal. Accounting firm Andersen audited Enron's financial statements and is accused of shredding important documents related to the investigation. Although Walker acknowledged that "Enron caused a lot of people to come around to our way of thinking," he said the changes in the auditing standards were in the works before the current scandal broke. Some small accounting firms argued during the drafting of the new rule that the changes to federal auditing standards would impose a hardship on auditors and their clients, who would be deprived of certain consulting services permitted under AICPA rules. But Walker said protecting the public interest and maintaining objectivity in the auditing process took precedence over such considerations. "People who review and analyze this [rule] will come to the same conclusion that it's the right thing to do and the right time to do it," Walker said. The new rule applies to any auditor who reviews the financial statements and performance of federal agencies and organizations. That includes GAO itself, agency inspectors general and major private auditing firms, such as Andersen and PricewaterhouseCoopers.

The new standard will restrict the fairly common practice of auditors providing their federal clients with consulting services, Walker said. "The inspectors general do it, GAO does it, and private sector firms also currently try to provide some kind of consulting." GAO also announced Friday that the 24 major agencies covered under the 1990 Chief Financial Officers Act must form audit committees, but officials are still hammering out the details of that mandate. "The scope, structure and timing of this new requirement will be determined over the next several months," GAO said in a statement.

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