Proposals and cost allocation plans in the light of auditor’s independence requirements.
The Government Accountability Office (GAO), on January 25, 2002, issued an amendment to Government Auditing Standards (1994 revision), Amendment No. 3, Independence, which substantially changed the previous standard to better serve the public interest and to maintain a high degree of integrity, objectivity, and independence for audits. The most significant changes included in this amendment, related to the standards associated with non-audit, or consulting services. Auditors have the capability of performing a range of services for their clients if they do not violate the principles of independence and comply with the required safeguards.
Generally Accepted Government Auditing Standards (GAGAS), also known as the Yellow Book (guidelines for audits created by the Comptroller General and the audit agency of the U.S. Congress, GOA), recognize that non-audit services are provided by audit organizations and that certain steps needs to be taken to avoid situations that can impair auditor independence, either in fact or appearance, to provide financial audits, attestations engagements, or performance audits in accordance with GAGAS. Even so, there are some circumstances where it is not appropriate for the audit firm to perform both audit and selected non-audit services for the same client. In these circumstances, the auditor and the auditee will have to make a choice as to which of these services the audit firm will provide.
The preparation of an indirect cost proposal for clients is listed as a non-audit service.
Can auditor be engaged to perform an audit and be selected to prepare an indirect cost rate proposal for the same clients?
Uniform Guidance (2 C.F.R. Part 200) establishes uniform administrative requirements, cost principles, and audit requirements for Federal awards to non-Federal entities. The 2 CFR § 200.509 (Auditor selection) very specifically addresses the limitation for this non-audit service. The auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million. This restriction applies to the base year used in the preparation of the indirect cost proposal or cost allocation plan and any subsequent years in which the resulting indirect cost agreement or cost allocation plan is used to recover costs.
The auditor performing an audit can still provide the non-audit service of preparing the indirect cost proposal or cost allocation plan only if both conditions are met:
- indirect costs recovered by the auditee during the prior year did not exceed $1 million as described in 2 CFR & 200.509; and
- management has taken responsibility for all significant assumptions and data used in preparation of such document and auditor complied with required safeguards.
If the above conditions are not met, the auditor cannot be selected to prepare the indirect cost proposal or cost allocation plan and the service should be provided by another CPA or qualified professional.
Iwona Sornat, CPA
Iwona is a Manager in Cerini & Associates’ audit and consulting practice, and she has more than 10 years of experience in providing various audit, review, accounting services to nonprofit, for-profit and government clients. Iwona has a strong background of financial statement and audit experience, including all aspects of grant compliance and single audit testing (Uniform Guidance). Iwona’s technical knowledge and experience allows her to provide effective and efficient audit service to her clients.