PCIE STANDARDS SUBCOMMITTEE POSITION STATEMENT NO. 4 DECEMBER 5, 1988 ISSUES What uniform policies and procedures will be followed by inspectors General when making referrals to the state boards of accountancy and the American Institute of Certified Public Accountants? What is a referable action? What essential elements are needed in a uniform Inspector General referral package to make it more useful to the state boards of accountancy and the American Institute of Certified Public Accountants? BACKGROUND AND DISCUSSION The Inspector General Act of 1978 requires that each Inspector General "take appropriate steps to assure that any work performed by non-Federal auditors complies with the standards established by the Comptroller General." This duty is accomplished in part by the Inspector General's performance of desk reviews and audit workpaper reviews of audit reports submitted by non-Federal auditors (IPAs). As a result of these reviews it may be determined that the auditor did not comply with standards established by the Comptroller General or other appropriate professional standards. The auditor's non-compliance with the standards may warrant a referral to the appropriate sanctioning or licensing authority. The purpose of this position statement is to describe: (1) uniform Inspector General policies and procedures for making referrals, and (2) a uniform Inspector General referral package. It was through a PCIE Standards Committee project that information was obtained from 53 of 54 state boards of accountancy as to the type of information they would need in a referral package. With the information provided from the state boards and through other discussions a uniform Inspector General referral package has been developed by the PCIE Standards Sub-Committee. POSITION Referable Action A referable action is when the audit report or underlying audit work have significant inadequacies which make the audit so pervasively deficient that users can not rely on it. The following are significant inadequacies. 1. The auditor is unqualified, i.e., not properly licensed as a CPA or public accountant or not independent. 2. Working papers are sufficiently inadequate to preclude an assessment of the adequacy of the auditor's work on the study of internal controls or the testing of compliance requirements; the deficiency is pervasive rather than isolated. 3. A major component of the report is missing, e.g., financial statement(s), opinion, report on compliance, required supplemental schedule, etc. 4. The auditor fails to correct substandard work on a timely basis. 5. The auditor fails to review compliance with requirements. 6. The auditor fails to perform an appropriate evaluation of internal controls. 7. The auditor commits one or more other gross departures from GAGAS which undermines the creditability of the audit. Some examples are: - lack of due professional care; - lack of sufficient evidential matter; - unjustified use of audit guide(s) not considered generally accepted; and - lack of site visits Procedures The Office of Inspector General (OIG) should correspond in writing with the IPA to set forth the conclusions of the desk review and/or audit working paper review which may result in a referral. This correspondence should contain specific details of the deficiencies noted and the applicable audit standards that have been violated. Referrals for violations of fieldwork standards would normally be based on results of a working paper review. The criteria that is being used to evaluate the deficiencies should be specifically cited. The IPA should be given the opportunity to respond to the OIG's correspondence. If the IPA chooses not to respond to the correspondence it should be noted in the referral. If the IPA responds to the correspondence, then a reply from the OIG may be appropriate. Referrals should be made to the state board of accountancy that licensed the individual/firm and, if different, to the board where the entity that was audited is located. Simultaneously, a referral should be made to the AICPA if the IPA is a CPA and a member of the AICPA or a state society. The decision as to who should be named in the referral will depend on the individual circumstances. At a minimum, the partner, manager, and supervisor responsible for the audit should be named. Additionally, individual assistants may be named in the referral depending on the violations. if the state board involved requires a firm to be licensed, the OIG should consider making the firm a subject of the referral. Uniform Inspector General Referral Package The package should contain the following: 1. A cover letter addressed to the appropriate state board of accountancy/AICPA that: (1) specifically states that the referral is a complaint, (2) highlights what GAO/AICPA standards were violated, (3) gives a commitment that OIG's workpapers are available for the board's use, (4) includes an offer that OIG personnel will be made available to testify at any hearings, (5) notifies the state board if similar letters are also sent to other state boards or the AICPA, and (6) requests that the OIG be advised of the decision the state board/AICPA rendered. 2. The following enclosures: a. A copy of the IPA's report that is the subject of the referral; b. A copy of the correspondence that was sent to the auditor that discusses in detail the deficiencies of the audit work; c. A copy of the correspondence received by the OIG that contains the IPA's views or response; and d. If appropriate, a reply from the OIG to the views submitted by the IPA. (The OIG's reply may be included in the cover letter to the state board /AICPA rather than presented as a separate document.) A copy of the cover letter should be sent to the IPA to make him/her aware of the OIG's actions.