Academic journal article The Government Accountants Journal

Internal Control Assessments - Are They Needed on Performance Audits?

Academic journal article The Government Accountants Journal

Internal Control Assessments - Are They Needed on Performance Audits?

Article excerpt

Internal control assessments are an accepted requirement for financial audits, but are they really needed on performance audits? Do auditors recognize this need and accept the responsibility and perform consistently high-quality work that stakeholders expect and deserve? These questions deserve closer scrutiny.

In attempting to answer these questions. let's consider our immediate history--the decade of the 1980s--to see if we can learn from that; then let's review how the U.S General Accounting Office (GAO) has tried to improve the quality of its audits and, more specifically, how GAO has implemented the internal control assessment standard.

WHAT CAN WE LEARN FROM HISTORY?

The decade of the 1980s was an eye-opener for the auditing profession. We had revelations of wrongdoing by the press on a regular basis, and these were getting increasing attention. It was not merely disclosures in newspapers, magazines and television, but the courts and the stakeholders of these audit reports were showing more interest. Auditors were sued more often, and judgments against the auditors were a frequent outcome. The question raised in many situations was:

WHERE ARE THE AUDITORS?

Quality often was the central issue in these cases. By examining a few of these cases, an obvious conclusion is that some audits did not meet the standards of the profession or the standards were inadequate.

RAMONA SAVINGS AND LOAN

Ramona Savings and Loan is a small institution north of San Francisco in Marin County. 1! Ramona Savings and Loan's auditor of record was one of the Big six. The auditor was about to issue a disclaimer on the S&L when he was dismissed.

Management brought in Michael Sage, a practicing CPA licensed in California. Michael Sage examined the books and records of the S&L and found the financial position to be in good shape with a profit of $4.3 million and a net worth of about $9.2 million. When the regulators became suspicious, they sent their team to examine the books. Guess what they found? Instead of the $4.3 million profit, they found a $17.1 million loss. Instead of the $9.2 million net worth, they found a negative net worth of $21 million.

Accountants always like to argue whether or not the finding is material. I submit that none of us would have had problems with these numbers; we would all readily admit that the two outcomes were material. How could this happen? Was Michael Sage that incompetent? Were there other factors that influenced the outcome? As reported in the press. Michael Sage got $90,000 in loans from the S&L and $75,000 in questionable payments; that may just have influenced or bought that rosy opinion.

California has since lifted Michael Sage's license. He has been indicted on several counts. The last I heard, they were still looking for him--apparently, he skipped the country.

This case illustrates several problems prevalent in the 1980s: opinion shopping, poor quality of work, unethical behavior on the part of management and the auditor and improper oversight.

THE SAVINGS AND LOAN PROBLEM

The S&L debate, of course, was another phenomenon of the 1980s. GAO was one of the first to highlight the problem. We testified several times in the mid-1980s, noting a depleted reserve for the FSLIC insurance fund.

Some people thought hat GAO was off base when it first highlighted the problem. But, by the second year, there was no longer a question of whether the problem existed; instead, the debate was about the size of the problem. GAO's latest testimony estimated the cost during the next 40 years to be about $325 to $500 billion.

A recent article in Fortune 2! updated the S&L debacle. It cited 446 indictments and 331 convictions to date and said the numbers are growing. Collectively, S&L criminals have received 689 years of sentences, an average of about 3-1/2 years per individual. The single largest sentence was 30 years for Woody Lemmons of the Vernon Savings and Loan in Dallas. …

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