Could North Carolina's State Auditor perform CAFR test work, federal assistance review, or internal-control review at the Department of Insurance under the two-year restriction in G.S. 147-64.12(b)?

Plain-English summary

The North Carolina State Auditor asked whether his office could perform three kinds of work at the Department of Insurance: test work for an opinion on the Comprehensive Annual Financial Report (CAFR), a review of the department's schedule of federal financial assistance, and a review of its internal-control structure. The AG answered that the office should not conduct any of the three for a period of two years.

G.S. 147-64.12(b), as quoted in the opinion, prohibited the Auditor from auditing a program or activity for which he had management responsibility or was employed during the preceding two years. G.S. 147-64.4(1) defined an audit as an independent review or examination of government organizations, programs, activities, and functions. The AG found that CAFR test work and the federal assistance schedule review fell within the financial-and-compliance element of an audit. The internal-control review also came within the statutory definition, whether as financial and compliance or as economy and efficiency work.

The opinion speaks of the Auditor and “your office.” It does not describe a particular employee's prior job, set a start date for the two-year period, or propose using different staff or an outside firm to do the work.

Currency note

This opinion applies the statutes and proposed Department of Insurance work described in 1993. Check current law and the actual circumstances for a present audit assignment.

Background and statutory framework

The Auditor's office described the CAFR test work as seeking reasonable assurance that the financial statements were free of material misstatements. The AG linked that purpose to the statutory audit element asking whether financial reports are fairly presented. The opinion also noted the Auditor's statutory responsibility to conduct appropriate tests of CAFR data.

The federal assistance schedule review had been limited to about eight hours, and the Auditor's letter said it was not an audit under professional standards. The AG instead applied the statutory definition: the review sought assurance that there were no material instances of noncompliance. The proposed internal-control review sought to understand the department's ability to prevent and detect material noncompliance. The AG concluded that both reviews fell within the statutory audit definition and that the office should not perform them for two years.

Common questions

Did the AG treat limited CAFR test work as an audit?

Yes. The opinion said the work fit the financial-and-compliance element and advised that the Auditor's office should not conduct it at the Department of Insurance for two years.

Did the short federal assistance schedule review escape the restriction?

No. Even though the office described it as about eight hours and not an audit under its professional standards, the AG concluded it fit the statute's financial-and-compliance audit element.

Could the office conduct the internal-control review?

The AG said it should not do so for two years. The review came within the statutory audit definition, whether as financial and compliance work or economy and efficiency work.

Did the AG authorize a different staff assignment or outside contract?

No such option is discussed. For each question, the opinion advises that the Auditor's office should not perform the specified Department of Insurance work for a period of two years.

Source

• Landing page: https://ncdoj.gov/opinions/conflict-of-interest/

Original opinion text

1. Would it be inconsistent with N.C.G.S. §147-64.12(b) for your office to perform the test work at the Department of Insurance that is necessary to issue your opinion on the CAFR?

Answer: It is our conclusion that the answer to this questions is "yes".

Subsection (b) of this statute prohibits the Auditor's conducting an audit on a program or activity for which he had management responsibility or in which he was employed during the preceding two years. "Audit" is defined under N.C.G.S. §147-64.4(1) as "[a]n independent review or examination of government organizations, programs, activities, and functions." An audit may include one, two or three of the following elements: financial and compliance; economy and efficiency; and program results.

Although the test work performed by your office at the Department of Insurance has been limited, the purpose of the CAFR audit work, as stated in your letter, is to obtain "reasonable assurance that the financial statements are free from material misstatements." This review appears to be contemplated under the "financial and compliance" element of an audit, as described in N.C.G.S. §147-64.4(1)a., in that it is a determination of "whether the financial reports of an audited entity are presented fairly." The Auditor, moreover, is expressly granted the responsibility to conduct appropriate tests to "satisfy himself concerning the propriety of the data presented in the Comprehensive Annual Financial Report. . . ." N.C.G.S. §147-64.6(c)(11). In our opinion your office should not conduct this test work at the Department of Insurance for a period of two years.

2. Would it be inconsistent with the provisions of N.C.G.S. §147-64.12(b) for your office to review a schedule of federal financial assistance received by the Department of Insurance?

Answer: It is our conclusion that the answer to this question is also "yes."

According to your letter, the Single Audit work for the Department of Insurance has been limited to approximately eight hours for review because the Department does not have a major federal financial assistance program. You also stated that the Auditor's work in reviewing the schedule of federal funds received by the Department "is not what is considered an audit under our professional standards." Notwithstanding this conclusion by your office, the action of reviewing a schedule of federal financial assistance received by the Department of Insurance also appears to be contemplated under the "financial and compliance" element of an audit. As stated in your letter, the purpose of the audit procedures is "to provide reasonable assurance that there have been no material instances of noncompliance." Our opinion again is that your office should not review a schedule of federal financial assistance received by the Department of Insurance for a period of two years.

3. Would it be inconsistent with the provisions of N.C.G.S. §147-64.12(b) for your office to review the internal control structure of the Department of Insurance?

Answer: We conclude that this question must also be answered in the affirmative.

You stated that your office has reviewed the internal control structure of the Department of Insurance on a periodic basis because the agency is without major federal assistance programs. The purpose of this review is "to gain an understanding of [the Department's] ability to prevent and detect material instances of noncompliance." Whether this review represents a "financial and compliance" element of an audit or an "economy and efficiency" element of an audit, the review seems to come within the purview of the statutory definition of "audit." Your office, therefore, should not conduct such a review for a period of two years.

If you have questions concerning this response, please feel free to contact us at 733-6118.

MICHAEL F. EASLEY
Attorney General

Jo Anne Sanford
Special Deputy Attorney General

Sue Y. Little
Associate Attorney General