Yellow Book: The Gold Standard

CPA Journal, The, May 2008 by Grumet, Louis

Working Toward Better Government Audits in New York State

Most nonprofits and all government agencies that accept federal money are required to have their audits performed in accordance with Government Auditing Standards-the "Yellow Book," arguably the most rigorous auditing standards in existence. These standards, set by the comptroller general of the United States, apply to both mandatory financial audits and to voluntary audit services that are subject to standards for performance audits.

New York State's school districts, fire districts, and public transportation are supported in part by the federal government. Federal funding also pays for the lion's share of New York residents' Medicaid benefits. Yet, audits for the majority of New York State government-funded entities can't lay claim to meeting even the less-rigorous generally accepted auditing standards (GAAS) issued by the AICPA. New York's taxpayers deserve better accountability for how their money is spent Implementing Yellow Book standards for all New York State programs would increase accountability without having to reinvent the wheel.

Benefits of the Yellow Book

Yellow Book standards require auditors to undergo peer review and receive specialized continuing professional education. Applying the standards to all local and state government agencies in New York would establish a foundation for a future single audit requirement and include definitions that all auditors can use. A floor of $500,000 in state funding per fiscal year could be used to exempt smaller entities. Currently, municipally funded programs administered by local governments and notfor-profit organizations in New York do not have a clear single set of audit requirements for the state funding they receive. Consequently, a nonprofit that receives funding from multiple agencies at the state and local levels is required to file different reports with each agency, with no uniform reporting standard and many unclear or contradictory definitions.

The Society's task force on governmental audit quality recognized the need to expand the scope of Yellow Book standards. The task force identified two sets of problems. First, there is no assurance to New York State agencies that fund these programs and ultimately New York State taxpayers that sufficient audit coverage is obtained. second, when recipients of money for multiple New York State-funded programs, particularly not-for-profit organizations, are subjected to audits of each program, this often results in resources being strained when the organization must simultaneously meet the needs of multiple auditors.

Building to the Single Audit

Well-functioning local government entities and nonprofit organizations are vital to the public. A lack of oversight in financial accountability by local government officials, as well as the board members of nonprofit organizations, underscores a serious problem. Part of the problem is inadequate auditor training, the lack of peer review for auditors, and the lack of a single audit. Too many public entities appear to take audits lightly and seem unwilling to pay for a proper audit.

Citizens should not be taking risks when they pay their taxes. If Yellow Book standards were required for New York State-funded entities, taxpayers would benefit from those standards' independence, continuing education, and peer review requirements. Broader implementation of the Yellow Book would improve the quality of audits of government and not-for-profit organizations. It would also promote audit economy and efficiency, and ensure professional competence.

Many other states have already adopted Yellow Book standards. In implementing them, New York would have the benefit of learning from those other states that have successfully raised the bar of audits of their publicly funded programs. Once higher standards are in place, a single audit requirement of publicly funded programs and entities would be one step closer to reality.

Louis Grumet

Publisher, The CPA Journal Executive Director, NYSSCPA

lgrumet@nysscpa.org