This article explores the changing role of government internal auditors in light of the increased emphasis on accountability. Specifically, it will review the problem of attesting to the veracity of a government entity's financial statements by auditors who are employees of that entity. The capability of these auditors to provide a reliable financial audit opinion rests upon their ability to work independently.
This independence problem will be examined in the context of the Air Force Audit Agency (AFAA). The AFAA is the internal auditing function for all U.S. Air Force activities throughout the world. It examines operational, planning and now financial reporting for the Air Force and its various components.
The responsibility for auditing the stewardship statements of the various departments of the federal government is assigned to the departmental inspectors general (IG) under the Chief Financial Officers Act of 1990. The IGs are permitted to outsource this audit work. Some IGs have passed the responsibility to various audit agencies throughout the federal government (the U.S. Department of Defense IG asks the individual service audit agencies to perform this audit), while others have hired independent public accountants on behalf of the auditees, who pay for the audit.
These audits are to be conducted according to the professional standards established by the U.S. General Accounting Office (GAO), the Institute of Internal Auditors (IIA) and the American Institute of Certified Public Accountants (AICPA). These standards can be viewed in two distinct categories: general standards and specific standards for reporting and field work. The general standards include independence, competence and due diligence. These are interrelated concepts: the "lack of one-diligence, for example-- presupposes a lack of competence. An auditor who is not independent is probably incapable of performing an audit with sufficient due diligence."1
The following discussion focuses on the independence of the auditor-- not the remaining general standards or the specific standards, even though they are just as essential as independence to the conduct of any audit. In the recent past, the issue of auditor independence has received significant attention from the internal auditing and public accounting professions.
The Problem with Independence
For many years both government accountants and external accountants have struggled with what constitutes independence. The second general standard requires an auditor be independent so that those who rely on the auditor's opinion know that that opinion has not been biased in any way.2 Therefore, the impartiality that the auditor has in judging the fairness of the financial statements serves not only the client organization but also those who deal with the client--creditors, investors and others who may depend on the independent auditor's report.
It is the perceptions of the creditors, investors and others that determine if the auditor has achieved the appearance of independence. Since this independence in appearance is critical to the practice of public accounting, auditors must not have any interest, financial or otherwise, in the client and must not be obligated to the client beyond providing the services for which the auditor was hired.
One independence problem arises because government internal auditors must perform their own department's financial statement audit. The increase in responsibilities and scope of audit work has been significant. These additional audit tasks also increase the technical demands on organizational auditors, as the audits are primarily financial in focus and require the examination of substantial financial systems. This increased emphasis on the financial audit will be the focal point for those who question any organization's ability to perform the attestation function on their own financial statements. This aspect of the additional responsibilities may not have been fully examined by Congress. …