GAO Issues Exposure Draft on Auditor Independence.

• Position: Brief Article

On May 4, the U.S. General Accounting Office issued an exposure draft proposing revisions to the general standards on auditor independence in Government Auditing Standards. If adopted as proposed, the independence standards will expand the definition of personal impairments, highlight the distinction between external and internal reporting, and prescribe the ways that certain governmental organizations can be free from organizational impairments to independence.

The proposal impacts both government auditors and public practitioners who perform financial and performance audits under Government Auditing Standards. This would include audits of federal, state and local governments as well as not-for-profit and for-profit recipients of federal (and some state) grant and loan assistance. The independence standards are applicable at the entity-wide level, not just to government programs and assistance.

The proposal would create an additional set of independence rules CPAs must adhere to that, although comparable to the AICPA's independence rules in some respects, differs in several ways. This not only adds to the complexity of independence standards, but also increases the overall difficulty of audit practice.

The ED requires independence in both fact and appearance, and includes specific examples of non-audit services that, if performed by an audit organization (government or public) for an audit client, create an impairment to independence. Such examples include bookkeeping or similar services; designing or implementing information systems; appraisal or valuation services; actuarial services; management functions; human resources services; broker-dealer services; and indirect cost proposals.

While bookkeeping services is listed as a service that would impair independence, the proposal does permit the auditor to assist the audited entity in preparing financial statements based on information in the entity's records provided the auditor does not perform any management functions or make management decisions. It is unclear...