Standardized language and contract templates help public sector entities or government-funded nonprofits streamline their procurement processes. When it comes to contracting a third-party auditing firm for required assurance services, however, this general approach may not go far enough to comply with the auditor’s professional standards and protect the independence of the audit report itself. Since public sector audits are critical to demonstrate accountability and maintain public trust, let’s review several areas where the typical contract language may fall short of fiduciary obligations and accounting industry standards.
Important Contract Provisions for Government Audit Services
The basic contract template often used by governments does not include the quality assurance and technical provisions needed to ensure the independence of audit services performed. Governments may be reluctant to alter their standard template, which often leads firms to supplement the agreement with an engagement letter that speaks to the level of detail required to maintain independence.
In such cases, the procurement team should consider creating an alternate contract template for professional services that includes critical provisions related to indemnification, work product or staffing approvals, warranties, insurance and ownership of records.
The AICPA recommends that contract language for each of these provisions should be crafted with the following unique considerations in mind stemming from accounting industry professional standards, such as:
- Auditing firms cannot indemnify the client (this may require negotiation between legal counsel and the proposing auditor)
- An auditor’s proprietary testing methods, calculations, assessments or work papers may run up against privacy, intellectual property or freedom of information request issues
- Contractual requests to oversee or approve auditor work or staffing decisions may cause undue influence on independence
Government procurement teams that take the above factors into account when contracting for audit services will enjoy greater confidence in the independence of the final report and foster an environment of increased transparency, communication and trust between all parties.
RKL’s Government Industry Group has decades of experience serving the assurance needs of government entities and we’re well-versed in the necessary requirements to ensure independence and integrity of the final report. Contact Mark Zettlemoyer for more information on how to assess current contract or engagement letter language or create a new contract template.