“ARRA and Single Audits” by Schmutte

The summary of the article

The authors of this article, James Schmutte and James Duncan, discuss the adoption of the American Recovery and Reinvestment Act (ARRA), which increases expenditures on federal social programs. In particular, they focus on the challenges, arising in connection with auditing non-for-profit organizations, which receive federal rewards. On the whole, they argue that auditors should pay more attention to documentation because it is instrumental to the integrity and effectiveness of non-profit entities. Moreover, they believe that appropriate documentation can speed up the whole process of audit and contribute to better cooperation between various auditing agencies.

The scholars aim to develop strategies for ensuring that the money, allocated by the government, is spent in the most appropriate way. The authors state that social federal programs will be awarded more than $ 350 billion stimuli. Theoretically, with the help of this money, it will be possible to address the most urgent needs of American society. Yet, the government has to raise accountability and auditing standards for non-profit entities, if they want to maximize the positive effects of ARRA.

James Schmutte and James Duncan review the study, carried out by President’s Council on Integrity and Efficiency (PCIE). This study indicates that only 20.5 percent of A-133 audits were carried out in compliance with accounting norms, whereas others contained either minor deficiencies or even significant errors in material reporting (PCIE as cited in Schmutte & Duncan, p 24). According to the study, auditors often overlook the importance of documentation, and some significant details are omitted; in particular, internal controls of the organization are not always tested. Such careless attitude will no longer be accepted by the government when ARRA awards will be distributed.

Overall, the results of the study, carried out by PCIE, eloquently demonstrate that the quality of A-133 audits leaves much to be desired and it can immensely downgrade the effectiveness of ARRA. This is why James Schmutte and James Duncan attempt to map out strategies for coping with this problem.

Judging from this study, the authors develop their own model of a risk-based single audit that is designed to conduct an inspection of non-for-profit organizations, spending more than $500,000 of federal funds per year. Their model consists of the following steps:

1. risk assessment;
2. major program determination,
3. program-level response
4. compliance test;
5. evaluation of results (Schmutte & Duncan, p 25).

The authors stress the importance of understanding internal controls, which are vital for the effective performance of the organization and reliable financial reporting. The scholars insist that every A-133 audit must include detailed information about internal controls in a not-for-profit organization. This information will be of great assistance to those people, who will conduct subsequent audits and will facilitate the collaboration among auditors. (Schmutte & Duncan, p 25).

In addition to that, the authors maintain that determining major programs of a non-for-profit organization is critical for an A-133 audit. In other words, the auditor must know which of the programs should be chosen for the compliance test (Schmutte & Duncan, 24). As a rule, these programs are chosen on the basis of expenditures and risk analysis. These are the key points, which should be taken into account by an auditor.

This model can be regarded as step-by-step instructions for auditing non-profit organizations irrespective of their size, structure, type of activity, etc. The authors admit that these guidelines are not definitive; however, in their opinion, such instructions can diminish the deficiency rate among A-133 audits. Finally, this approach will help to minimize any possibility of fraud, theft, or poor utilization of resources.

Overall, the scholars believe that the success or failure of the ARRA act will strongly depend on the effectiveness of audit firms, who must make sure that the federal funds are utilized in the best interests of the public. In conclusion, James Schmutte and James Duncan provide instructions to those firms, specializing in an audit. They suggest that these firms should join AICPA’s Governmental Audit Quality Center because in this way they can obtain a valuable source of information (Schmutte & Duncan, p 26). This may be of crucial importance because auditing standards constantly evolve, and it is vital to be in the know. Finally, the scholars argue in favor of the peer review process. From their standpoint, A-133 audits ought to be reviewed by independent organizations. In the long term, it can significantly raise the quality of auditing.

Problem statement

The critical issue is the lack of control over non-for-profit organizations. The federal government is not always able to track down the financial activities of such entities. As a result, there is the probability that the money, provided by the government will not affect the well-being of the American people. In part, it is connected with the fact that some organizations do not have well-developed internal control mechanisms, which are supposed to detect or prevent fraud or inefficient use of resources.

This is arguably the key problem that should be addressed by auditors. We have to admit that they are not the only ones, responsible for this task. There are other law enforcement agencies, for example IRS (Internal Revenue Service), which must detect and prevent fraudulent or any other illegal activities. However, auditors play the most prominent role.

The second issue is poor quality of auditing that does not meet the established standards. As it has been noted earlier, many audits contain inaccuracies or even blatant mistakes, for instance, superficial risk assessment or poor analysis of internal control mechanisms. On the one hand, this inappropriate documentation slows down the functioning of governmental organizations; on the other hand, this negligence can give rise to theft and fraud. It is quite possible for us to argue that these two issues are closely related and that main responsibility lies on the shoulders of public auditors.

The key factors, which lead to the problem

In this part of the paper, we are going to list and analyze those factors, which lead to such problems as lack of control over non-profit entities and poor quality of audits. They are as follows:

1. Lack of standardization. There are no clear guidelines for performing single audits. These reports may take various forms, depending on the type of organization, its size, and structure. In turn, this may result in inappropriate documentation. In part, this is the reason why James Schmutte and James Duncan have worked out their own model of conducting single audits. Of course, it cannot be viewed as the ultimate guideline, but it is a good starting point.
2. Lack of coordination among public auditors. This means that auditing organizations, which inspect non-for-profit entities, seldom share information with one another and this poor cooperation complicates their work. For example, auditors always have to determine the risk status of the organization. For this purpose, it is necessary to observe its operations, obtain references from its partners and so forth. If auditing agencies closely collaborate with one another, they will be able to save much time and effort. The thing is that A-133 audits are not always done by the same organizations, very often an auditor must refer to the previous reports. However, previous reports cannot be accessed quickly and sometimes they contain many inaccuracies. In part, such situation can be explained by the fact that various auditing agencies have different quality standards.
3. Insufficient knowledge of non-profit organizations. An auditor, who inspects a non-profit entity, has to be well-aware of its functioning. In this case, we are speaking about medical institutions, healthcare organizations, charitable foundations etc. In order to determine, whether they are complying with federal regulations or not, an auditor should first know how they actually work. In particular, this person has to know about their expenditures, sources of revenue, major activities, etc.
4. Inappropriate fraud prevention laws. The problem is that many organizations only claim to be non-for-profit, while earning a considerable income. This situation is quite widespread among medical institutions. Sometimes such organizations find a leeway in legislation and pass as non-profit entities. Naturally, this problem is not directly connected with auditors; most likely it is the duty of legislators and law enforcement agencies to stop such fraudulent activities. Nonetheless, auditors are responsible for detecting them.

These examples indicate that auditors have a chance to determine the outcomes of ARRA. Most likely, the quality of their work will have a tremendous impact on the development of US economy. However, they will be able to perform their duties effectively only if they are assisted by legislators and law enforcement agencies.

The relevance of the article to auditing environment

James Schmutte and James Duncan raise several questions, which are extremely relevant to the auditing environment. First, they provide a framework for inspecting non-profit-organizations. As it has been mentioned earlier, there are no clear-cut instructions for auditing such entities. This is why the model, proposed by the scholars, can be of great interest to many auditors. Secondly, they dwell upon such issue as accountability of non-for-profit organizations and they record their financial activities, transactions, expenditures, etc. The thing is that both accountants and auditors often struggle with this problem and its solution is crucial for these people. Finally, this article demonstrates the role of auditors in modern economy. American Recovery and Reinvestment Act can bring improvement only if these people do their work effectively.

Conclusion

The adoption of American Recovery and Reinvestment Act has undoubtedly raised the standards of performing A-133 audits. The auditors will be required to be more meticulous in the assessment of the organization’s financial reporting and performance and they will need to pay more attention to documentation. At this point, it is necessary to develop a universal framework for performing audits of non-profit entities. The article, which we have discussed, shows that without auditors have to take an active part in the implementation of ARRA in order to promote the best interests of American people.

Works Cited

Schmutte J. & Duncan James. “ARRA and Single Audits: Addressing the Risks and Challenges”. The CPA Journal, 2010, pp 22-26.