Will SAS #115 increase or decrease Significant Deficiency comments?

Here is a question for thought:  Do you think the change from a bright line definition of significant deficiency in SAS 112 (greater than remote chance of more than inconsequential error, etc.) to a very loose definition in SAS 115 (something the auditor believes should be brought to the attention of those charged with governance) will increase or decrease the number of significant deficiency comments? 

To frame up the discussion, I am thinking about the smaller entities, perhaps from $1 to $15 million of revenue in the non-profit community.

My thought process is that by calling something a “significant deficiency” and putting it in the same letter as the comments on material weaknesses we are clearly saying this is a ‘biggie’.  Don’t have any technical words now to describe that categorization like we did before, but we are obviously calling a lot of attention to the issue.  We still have the letter of recommendation as a tool to communicate suggestions, ideas, opportunities to improve internal control, or scold management for those pesky technical things we always comment on (you know, document every credit card purchase, list the who and why for all meal purchases, please get the fixed asset detail to tie to the general ledger). From my perspective, I think there are probably more items that will drop from the SD list to the LOR than move up from the LOR to the SD letter.  Possibly will be some SD comments that don’t need to be mentioned.  There are a lot of comments we auditors give to our clients that really should be fixed, but don’t seem to be serious enough to frame them up as a ‘biggie’.

One of the major CPA firms working in the non-profit community thinks the volume of comments will go up.  Another person in that school of thought was the presenter at a class I attended a while back.  His perspective, coming from running a very large volume of yellow book audits in his firm, is the volume of SD comments will increase.  If I recall correctly, his line of reasoning is if there is something that the auditor firmly believes in and is worth putting in writing, and then the issue probably should be brought to the attention of the board and thus is an SD. 

Had a fun visit with a colleague at another firm recently.  His thoughts are that the volume will increase.  I will rephrase his comments to reflect my expanded perspective of the issue.  So, this is partly my description, not completely his.  Since we as auditors are now freed of the bright line definition, we can reposition the comments as helpful ideas instead of problems at the mid-level of severity.  Instead of being a ‘problem’ to be fixed, the SD comments can now be phrased as something that we (the auditors) really thing you (the board or those charged with governance) should think about and work on.  How does this work for a characterization:  the SD letter become more of a structured ‘lets talk’ framework instead of ‘fix this problem’ notification.

One more idea – – since the definition is much more subjective, do you think there will be serious push-back from management during single audits?  Seems to me there will be massive push-back to prevent something that is only an opinion (without support of a bright line) from going to the federal agencies in writing.

So, those are my thoughts.  Perhaps this blog is too young for a conversation to begin. However, if you wish to comment, I would welcome the conversation.  Remember this is an evolving idea. Since it will take a few years to develop a wide consensus for the impact of the new definition, all opinions expressed here (including mine!) are subject to change and revision when we feel like it!

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