You may have heard about changes to the Yellow Book rules for your 2020 year-end and wondered what that will mean to you. For the most part, it means increased documentation that your auditor must contend with. The largest impact to you is related to the nonattest services that your auditor may help you with. For example, does your auditor assist you with the journal entries necessary to record some of the components of your district-wide financial statements, such as fixed assets, long-term debt, net pension liability, or other post-employment benefits? The answer is likely yes for many school districts.
The new Yellow Book rules state that independence would be impaired if the auditor performs the following services:
- Determining or changing journal entries, account codes, or classifications for transactions, or other accounting records for the entity, without obtaining management approval;
- Authorizing or approving the entity’s transactions; and
- Preparing or making changes to source documents without management approval.
If your auditor is helping you calculate adjustments and determine account codes to post adjustments to, you may see an increased level of approvals required by your auditor for such entries. Hopefully, your auditor was providing the information to you previously for approval, but under these new rules, management’s approval is crucial to your auditor remaining independent.
Also, if an auditor assists in preparing your financial statements, it is a threat to independence, and adequate safeguards need to be in place to address that threat. This was true under previous independence rules as well, but a good reminder is that ultimately the financial statements are the responsibility of the school district’s management. Someone from the district should closely review the financial statements to make sure they can take an appropriate level of responsibility.
Auditors are also required to look at the cause of any findings identified to determine what sort of control deficiencies may be present. Now would be a good time to revisit last year’s audit results and look at what sort of findings you may have had, or what types of management comments your auditors may have suggested as areas for improvement. Taking the time now to make sure you have followed your corrective action plan or addressed any of the management comments that were made will help set you up for a more successful audit.
One other change in the rules is the requirement for auditors to report abuse and waste if either are identified. This is anticipated to be a very subjective addition to the rules. Waste is defined as the act of using or expending resources carelessly, extravagantly, or to no purpose. The background on this is that the Government Accountability Office is looking for reporting of instances where funds are mismanaged. Be mindful as your grants are ending, if you have unspent grant dollars, to watch what you are spending the funds on. There should be a purpose for those funds and not extravagant use of those dollars.