OMB releases update on audit requirements

The Office of Management and Budget on Friday published updates to the requirements for auditing federal financial statements, changing the definitions of key terms and clarifying how agencies must report adjustments in prior-year audits.

The updates are published as OMB Bulletin 06-03, which implements audit provisions included in the 1990 Chief Financial Officers Act, the 1994 Government Management Reform Act and the 1996 Federal Financial Management Improvement Act.

The new guidelines were drafted with input from the inspector general community, according to OMB, and take effect immediately. Some changes align definitions more closely with those used in the private sector while others address questions previously raised by agencies.

"American taxpayers deserve a government that is both responsive and accountable," said OMB Deputy Director for Management Clay Johnson. "The new federal auditing guidelines reinforce the importance of proper accounting and reporting practices to ensure that we properly reduce wasteful spending in government and take care of the taxpayers' money."

The guidelines replace the term "reportable condition," referring to problems in the design or operation of an agency's processes to ensure reporting compliance and reliability, with "significant deficiency." The new term is more explicitly defined as a problem that affects an entity's "ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles" such that there is "more than a remote likelihood" of a serious misstatement.

The guidelines also include a new requirement that if agencies discover a confirmed or likely misstatement in a previously issued financial statement, the auditor must advise agency management to report the problem to groups that "may be relying" on the report. These groups could include legislative or regulatory oversight bodies, federal inspectors general and funding groups.

The guidelines do not describe the responsibility of agency managers to report such misstatements, which are addressed in OMB's Circular A-136, but they call for the auditor to do so if management does not report a problem in a timely manner.

A new section addresses service organizations, clarifying that agencies using outside providers should rely on the outside group's audit reports as needed. For service organizations, the guidelines require that audit reports be submitted to customers within a reasonable time frame for use in the reporting process.

The guidelines also include new provisions for agencies required to report on compliance for their financial management systems under FFMIA, and rules for voluntary reporting on compliance with OMB's Circular A-123, Appendix A, which addresses management's responsibility for internal controls.