Academic journal article The Journal of Government Financial Management

Reconciling "Consulting" under GAO & IIA Audit Standards

Academic journal article The Journal of Government Financial Management

Reconciling "Consulting" under GAO & IIA Audit Standards

Article excerpt

Many state and local government audit organizations subscribe to Government Auditing Standards, issued by the Comptroller General of the United States, and to Standards for the Professional Practice of Internal Auditing, issued by The Institute of Internal Auditors, Inc. (The IIA). However, the U.S. General Accounting Office's (GAO) new Independence Standard has caused some to question the propriety of continuing to reference both organizations' standards in audit reports. A recent letter from the GAO to The UA provides GAO's views on how The IIA's consulting services relate to independence under the Yellow Book standards.1


In 1999, The IIA included consulting services within its new definition of internal auditing. Subsequently, in January 2002, GAO's new Independence Standard defined nonaudit services as being synonymous with consulting in the case of non-government auditors who perform audits of government and nonprofit entities under Government Auditing Standards. (Par 3.19) GAO further stated that in certain circumstances it is not appropriate for an audit organization to perform both audit services and selected nonaudit services for the same client. In these circumstances and to remain independent, an audit organization will have to choose which service to provide. While GAO has not defined nonaudit services as synonymous with consulting for governmental auditors, those auditors still need to be concerned with any nonaudit services provided, regardless of how those services are defined or what they are called. This article examines how the GAO and IIA define the term "consulting," identifies similarities and differences, and makes recommendations for consideration.

Dialogue to date between these two organizations has confirmed that consulting as described by The IIA is more related to GAO's performance auditing and "constructive engagements" than to what GAO has described as nonaudit services. In its May 20, 2003 letter to The IIA, the GAO stated that as a result of the recent discussions with representatives from The IIA, "...we concluded that the vast majority of services provided by internal auditors that fall under The IIA's consulting definition and standards, are, in fact, assurance services or "constructive engagements," whereby the internal auditor maintains independence as defined by The IIA standards." GAO views the term "consulting" as problematic in that it provides the connotation that an internal auditor may not be independent. In its May 20, 2003 letter, the GAO recommends that The IIA use the term "constructive engagement" in The IIA standards rather than "consulting" to describe those services performed by internal auditors that facilitate management improvements on a real-time basis without compromising the independence and objectivity of the internal auditor. The good news is that both organizations see work that The IIA describes as consulting as a value-added service that can be performed under the audit standards as long as certain principles and safeguards are observed and applicable audit standards are followed.


In 1997, The IIA Board of Directors appointed an International Guidance Task Force to address the continued applicability of The IIA standards, some 20 years after their initial issuance. The task force concluded that the nature of the internal auditing profession has changed, outsourcing the internal audit function to external auditors was increasing and internal auditors were being asked by management to provide a higher level of value-added services.2 About this same time, the AICPA's The CPA Letter identified assurance services, technology and management consulting as three of the top five services to be provided by CPAs in the future. While recognizing the potential growth and impact of these new services on the profession, The IIA made it clear from the beginning that all services to be provided by internal auditors would be built around audit standards that emphasized auditor independence and objectivity. …

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