Examples of GAGAS Application

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Let's take a look at how auditors fulfill their professional obligations. Namely, these obligations are fulfilled under the provisions of the Generally Accepted Government Auditing Standards (GAGAS).

Briefly Revisiting the GAGAS

Imagine that you've just woken up and turned on one of the morning news shows. On the screen, a reporter is interviewing a local politician who is now being accused of bribery and corruption. When asked by the reporter for a response, the politician says, ''I want people to relax and know that the truth will come out. I have my top official, my chief of staff, doing a thorough investigation into my political dealings. If he finds evidence of a crime, he'll tell me so that we can correct it.''

Is this reassuring to you? Probably not, but why? In short, it's because the proposal lacks some of the most basic characteristics of auditing. Our politician's chief of staff is not independent because he works for the subject of the audit. His ability to exercise due care is also in question since (presumably) the lack of attention to due care is what started the mess in the first place. Finally, there is no supervision or quality control. If no other entity is involved in the audit, there's no way to tell whether the audit was conducted fairly and that its results are accurate.

Professional Responsibilities of Auditors per GAGAS Standards

That's where GAGAS standards come in. Specifically, they require that auditors be independent, that they perform due diligence, and that their work is quality controlled. Auditors are also required to obtain the necessary continuing education hours. Let's look at an example of each.

Independence and Quality Control

Imagine yourself as a successful CPA with a respectable portfolio of clients. Recently, one of your valuable corporate clients wanted to revise your consulting contract. You've been providing them with expert advice for several years, and now they're offering to increase your services (and fees) if you will provide them audit services as well. Will you do it?

One of the largest firms in the world, Arthur Andersen & Company, answered this question with a resounding ''yes'' - and it paid for that answer with its corporate life. Arthur Andersen had an excellent reputation for providing financial services, and the now-infamous company Enron was one of their biggest clients. The firm provided both consulting and independent auditing services to Enron, the degree of ''independence'' was dubious at best.

In the end, Arthur Andersen & Company overlooked or ignored significant accounting danger signs and instead certified the company's books as accurate. We now know just how misleading that was. Enron produced misleading financial statements that effectively disguised the company's poor financial position, and Enron's auditor failed to warn investors of this problem. Enron went belly-up, investors lost everything, many of the company's executives were sent to prison for fraud, and Arthur Andersen & Company was forced from the market in 2002.

All of this corporate carnage occurred because the ''independent'' audit wasn't so independent after all. Since Arthur Andersen was the auditor, not the subject of the audit, there was no quality control associated with their audit. To comply with GAGAS, an auditor must not be too cozy with their clients, and they must have a mechanism in place to ensure that they too are accurate and trustworthy.

Due Care and Supervision

In 2008, the Atlanta Public School system (APS) was flying high for its success improving student scores on standardized tests in at-risk schools. But an Atlanta newspaper, the Atlanta Journal Constitution, looked at the statistics and realized the reported improvement was nearly impossible from a statistical standpoint. The newspaper shared its findings with APS, but the district stated they had no plans to investigate the matter. Nevertheless, the paper's findings caught the attention of state officials who determined that widespread fraud or cheating was possible if not likely.

APS was compelled by the State of Georgia to conduct an internal audit. APS did so, but reported finding that no pattern of misconduct existed. In the end, the Georgia Bureau of Investigation (GBI) uncovered what became one of the most extensive and severe cases of fraud. The agency didn't uncover this using high-complexity resources. On the contrary, the most damning evidence came from personal interviews and counting eraser marks on paper tests. During the internal audit, APS administrators were in the room while subjects were interviewed, documents were ordered destroyed, and auditors ignored or explained away key evidence. In the end, many top officials from APS went to prison - some for as long as 20 years.

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