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Independence and Integrity: The 2011 Yellow Book Revisions

March 26, 2012

Leslie A. Zoll, CPA
Manager
BlumShapiro

As government entities continue to face economic pressures, they look to their auditors for additional advisory and consulting services to help make informed financial decisions.  During December 2011, the U.S. Government Accountability Office (GAO) issued its 2011 revision of Government Auditing Standards.  This standard, more commonly known as the “the Yellow Book”,  continues to give auditors guidance on performing high quality audit work that provides the accountability, integrity and transparency that the public has grown to expect from their auditors. 

One of the most significant changes in this revised Yellow Book, from its 2007 version, speaks to the importance of integrity as it expands its discussion on independence.  Chapter 3 of the standard provides more guidance on interpreting and documenting independence as it relates to all types of government services. 

In the 2011 revisions, the GAO removed the previous language of personal, external and organizational impairments and defines independence in two simple components:

  1. Independence of Mind – being free of influences that compromise professional judgment
  2. Independence in Appearance – the absence of circumstances that would cause a third party to conclude that the integrity of the audit team has been compromised

As operations continue to become more complicated, it is critical that auditors remain objective while still serving the needs of their growing and evolving organizations.  In this revision, the GAO attempts to provide a conceptual framework that can be used in these complex situations to ensure that accountability and integrity is maintained. 

The framework consists of a three step process:

Step 1:  Identify threats to independence

Step 2:  Evaluate the significance of these threats, identified, both individually
 and in the aggregate

Step 3:  Apply safeguards, as necessary, to eliminate or reduce the threat to
independence or reduce it to an acceptable level

These standards of independence apply to any timeframe that falls within the period covered by the financial statements or subject matter of the audit — from the signing of the engagement letter to the issuance of the audit report.

Threats to independence can come in many different forms, from self-interest threats to structural threats, some of which are now described in the standard.  The 2011 revision also gives further guidance by using examples of safeguards that will successfully limit the effect of these threats as it relates to independence. 

Auditors face more prevalent threats to independence when performing non-audit services.  The GAO addresses this in the 2011 revision by adding more guidance specific to non-audit services.  When performing non-audit services, the most important component in determining whether independence is impaired is to determine if the audited entity has designated an individual with the necessary skill, knowledge and/or experience from within that audited organization to oversee the non-audit service to be performed.  The procedures of the auditor and that of management must be clearly defined or independence may be impaired.

In an ever-changing technology driven environment, auditors can and should play an important role as business advisors to their government organizations.  In accordance with this standard, auditors can advise organizations on technical issues, provide examples of best practices and lend advice on more efficient ways to do business without impairing independence as long as the communication and documentation is presented in a manner that is consistent with the integrity and accountability of the audit profession and the above framework.  With integrity and independence, auditors can and will continue to provide recommendations and improvements to client organizations in these difficult times.

Note:  The effective date for this 2011 revision is broken out into two parts.  The effective date for financial audits and attestation engagements is for periods ending on or after December 15, 2012.  The effective date for performance audits is for audits beginning on or after December 15, 2011. Early implementation of this standard is not permitted.

 

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