Opinion ID: 2000132
Heading Depth: 1
Heading Rank: 2

Heading: Generally Accepted Auditing Standards Under Section 30.1

Text: The requirement that the Commission either conduct, or arrange to have conducted, an audit of the costs of new utility generating plants is central to ascertaining reasonableness under section 30.1. The audit is to be conducted in accordance with generally accepted auditing standards. (Ill. Rev. Stat., 1985 Supp., ch. 111 2/3, par. 30.1.) After considering evidence presented as to appropriate auditing standards in the present case, the Commission ruled that no specific set of written standards directly governed the type of audit mandated by section 30.1. The Commission stated that it was of the opinion that the reference to `generally accepted auditing standards' in the statute is simply a spelling out of the implicit requirement of professional competence in the auditor, both in its abilities and its performance. The circuit court ruled that the Commission's interpretation of section 30.1 was incorrect as a matter of law. Edison and the Commission contend that the Commission's interpretation of the phrase generally accepted auditing standards is a question of fact that cannot be reversed unless contrary to the manifest weight of the evidence. (See Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Com. (1960), 19 Ill.2d 436, 442; Ill. Rev. Stat. 1983, ch. 111 2/3, par. 72.) The intervenors maintain that the Commission's interpretation is a question of law which is not binding upon the courts. (See Winakor v. Annunzio (1951), 409 Ill. 236, 248.) We find that, regardless of whether the meaning of generally accepted auditing standards is identified as a legal or a factual question, the Commission's interpretation of the generally accepted auditing standards requirement in section 30.1 is erroneous under the evidence presented. After receiving a great deal of evidence as to what comprised generally accepted auditing standards, the Commission formulated its own interpretation of the generally accepted auditing standards requirement in section 30.1 as an implicit requirement of professional competence in the ability and performance of the auditor. The Commission's interpretation fails to acknowledge the evidence introduced by the parties. The expert witnesses agreed that no single written set of generally accepted auditing standards exists which apply specifically to the type of audits mandated by section 30.1. Edison and the intervenors presented complementary evidence, however, of a number of similar standards which applied to the audit conducted by ADL. At least two witnesses, one of them presented by Edison, testified that Standards For Audit of Government Organizations, Programs, Activities and Functions (rev. ed. 1981) (commonly known as the Yellow Book), published by the United States Comptroller General, generally applied to the ADL audit. Elmer Staats, Comptroller General at the time the Yellow Book was published, testified in behalf of Edison that applicable Yellow Book standards include the proficiency of the auditors and due care in conducting the audit. These standards mirror those identified by the Commission. Staats further testified, however, that other Yellow Book standards applicable to the type of audit conducted by ADL include auditor independence, lack of impairment of the audit effort, adequate planning, sufficient and competent evidence to support the auditor's judgment and conclusions, and auditor inquiry into a number of specified areas. The Commission's interpretation ignored these additional requirements. No party presented evidence or argued that Staats' statement of applicable standards was incorrect. Edison's other audit witness submitted that a general consensus exists as to standards governing audits of the type conducted by ADL, and that the Yellow Book reflects these standards. This witness indicated that Yellow Book standards that apply to the ADL audit include requirements of integrity and consistency in the audit, as well as auditor expertise; these standards are similar to the Commission's interpretation of generally accepted auditing standards. Also necessary in the opinion of this witness, however, were auditor independence, proper scope and planning of the audit, adequate evidence to support conclusions reached, and proper communication among the audit team, the entity being audited, and the regulatory body requesting the audit. The intervenors' witnesses identified standards applicable to the ADL audit similar to those cited by Edison's witnesses; this testimony is consistent with the intervenors' position that the Yellow Book standards apply here. Witnesses from ADL, the audit firm in the present case, were unfamiliar with the Yellow Book. The ADL witnesses therefore did not state that the Yellow Book standards did not apply, nor did they testify that any other standards offered by Edison or the intervenors did not apply; they stated instead that they had been influenced by standards promulgated by the New York Public Services Commission. Because the Commission's interpretation of the generally accepted auditing standards requirement included only two of the factors identified by the audit witnesses of Edison and the intervenors and ignores other standards the witnesses identified as applicable, we find that the Commission's interpretation of generally accepted auditing standards is against the manifest weight of the evidence. Furthermore, professional competence in ability and performance would be required of an auditor even if the requirement of generally accepted auditing standards was not in section 30.1. Certainly an audit would be inadequate if conducted with less than professional competence in either the auditor's overall ability or his performance with respect to that particular audit. The reference to generally accepted auditing standards, then, must require something more than professional competence; otherwise, the language regarding generally accepted auditing standards would be rendered superfluous. There is a strong presumption against finding statutory language to be mere surplusage ( Arnold v. Board of Trustees (1981), 84 Ill.2d 57), and nothing suggests that we should do so here. It is not important that the auditor, here ADL, was unaware of one set of standards or another. It is possible that an audit could be conducted properly without the auditor's identifying any specific set of standards under which it operates. It is important, however, that the Commission review the audit in light of some identifiable, generally accepted auditing standards. This assures that the audit was sufficient, measured against a generally accepted standard, and that the Commission properly performed its review function. The result is an audit that enables the Commission to determine whether a utility's costs are reasonable and can be included in its rate base. In addition, by identifying generally accepted auditing standards applicable to the audit, the Commission facilitates review of its decision by providing an objective and identifiable benchmark against which the court can measure the audit. Although it is within the Commission's province to accept evidence and to determine appropriate standards against which to measure the audit, it is within the power of the court to determine from the evidence on review whether the audit complies with the standards identified. Because the Commission, in its order, defined an improper standard against which to measure the audit, neither the Commission nor the circuit court here could properly determine whether the auditors sufficiently performed their audit function when measured against a proper standard. The expert witnesses presented by the litigants disagreed about the sufficiency of the audit under the generally accepted auditing standards that the witnesses identified. Our examination of the audit report reveals some areas in which the audit might have been improved. But, the expertise and evidence-taking function of the Commission is necessary to determine whether these deficiencies  if, indeed, they are deficiencies  render the audit insufficient under generally accepted auditing standards. It is for the Commission to determine proper standards against which to measure the audit and to then determine whether these standards were met in the present case. The record on appeal contains extensive evidence concerning the audit standards that apply to the type of audit required by section 30.1. On remand, the Commission may determine from the evidence presented which, if any, of those standards meet the generally accepted auditing standards requirement contained in section 30.1, or the Commission may require further evidence of standards in order to make that determination. Once the proper standards are identified, the Commission must determine from the evidence that has been presented, or from further evidence, whether the ADL audit met those standards.