PCIE STANDARDS SUBCOMMITTEE
                         POSITION STATEMENT NO. 4
                            DECEMBER 5, 1988

                                  ISSUES

What uniform policies and procedures will be followed by inspectors
General when making referrals to the state boards of accountancy
and the American Institute of Certified Public Accountants?  What
is a referable action?  What essential elements are needed in a
uniform Inspector General referral package to make it more useful
to the state boards of accountancy and the American Institute of
Certified Public Accountants?

BACKGROUND AND DISCUSSION

The Inspector General Act of 1978 requires that each Inspector
General "take appropriate steps to assure that any work performed
by non-Federal auditors complies with the standards established by
the Comptroller General."  This duty is accomplished in part by the
Inspector General's performance of desk reviews and audit workpaper
reviews of audit reports submitted by non-Federal auditors (IPAs). 
As a result of these reviews it may be determined that the auditor
did not comply with standards established by the Comptroller
General or other appropriate professional standards.  The auditor's
non-compliance with the standards may warrant a referral to the
appropriate sanctioning or licensing authority.

The purpose of this position statement is to describe: (1) uniform
Inspector General policies and procedures for making referrals, and
(2) a uniform Inspector General referral package.

It was through a PCIE Standards Committee project that information
was obtained from 53 of 54 state boards of accountancy as to the
type of information they would need in a referral package.  With
the information provided from the state boards and through other
discussions a uniform Inspector General referral package has been
developed by the PCIE Standards Sub-Committee.

POSITION

Referable Action

A referable action is when the audit report or underlying audit
work have significant inadequacies which make the audit so
pervasively deficient that users can not rely on it.  The following
are significant inadequacies.

     1.   The auditor is unqualified, i.e., not properly licensed
          as a CPA or public accountant or not independent.

     2.   Working papers are sufficiently inadequate to preclude an
          assessment of the adequacy of the auditor's work on the
          study of internal controls or the testing of compliance
          requirements; the deficiency is pervasive rather than
          isolated.

     3.   A major component of the report is missing, e.g.,
          financial statement(s), opinion, report on compliance,
          required supplemental schedule, etc.

     4.   The auditor fails to correct substandard work on a timely
          basis.

     5.   The auditor fails to review compliance with requirements.

     6.   The auditor fails to perform an appropriate evaluation of
          internal controls.

     7.   The auditor commits one or more other gross departures
          from GAGAS which undermines the creditability of the
          audit. Some examples are:

          -    lack of due professional care;
          -    lack of sufficient evidential matter;
          -    unjustified use of audit guide(s) not considered
               generally accepted; and
          -    lack of site visits

Procedures

The Office of Inspector General (OIG) should correspond in writing
with the IPA to set forth the conclusions of the desk review and/or
audit working paper review which may result in a referral.  This
correspondence should contain specific details of the deficiencies
noted and the applicable audit standards that have been violated. 
Referrals for violations of fieldwork standards would normally be
based on results of a working paper review.  The criteria that is
being used to evaluate the deficiencies should be specifically
cited.

The IPA should be given the opportunity to respond to the OIG's
correspondence.  If the IPA chooses not to respond to the
correspondence it should be noted in the referral.  If the IPA
responds to the correspondence, then a reply from the OIG may be
appropriate.

Referrals should be made to the state board of accountancy that
licensed the individual/firm and, if different, to the board where
the entity that was audited is located.  Simultaneously, a referral
should be made to the AICPA if the IPA is a CPA and a member of the
AICPA or a state society.

The decision as to who should be named in the referral will depend
on the individual circumstances.  At a minimum, the partner,
manager, and supervisor responsible for the audit should be named. 
Additionally, individual assistants may be named in the referral
depending on the violations.  if the state board involved requires
a firm to be licensed, the OIG should consider making the firm a
subject of the referral.

Uniform Inspector General Referral Package

The package should contain the following:

1.   A cover letter addressed to the appropriate state board of
     accountancy/AICPA that: (1) specifically states that the
     referral is a complaint, (2) highlights what GAO/AICPA
     standards were violated, (3) gives a commitment that OIG's
     workpapers are available for the board's use, (4) includes an
     offer that OIG personnel will be made available to testify at
     any hearings, (5) notifies the state board if similar letters
     are also sent to other state boards or the AICPA, and (6)
     requests that the OIG be advised of the decision the state
     board/AICPA rendered.

2.   The following enclosures:

     a.   A copy of the IPA's report that is the subject of the
          referral;

     b.   A copy of the correspondence that was sent to the auditor
          that discusses in detail the deficiencies of the audit
          work;

     c.   A copy of the correspondence received by the OIG that
          contains the IPA's views or response; and

     d.   If appropriate, a reply from the OIG to the views
          submitted by the IPA.  (The OIG's reply may be included
          in the cover letter to the state board /AICPA rather than
          presented as a separate document.)

A copy of the cover letter should be sent to the IPA to make
him/her aware of the OIG's actions.