Since 2000, the Government Accounting Standards Board and the American Institute of Certified Public Accountants have been the only standard-making bodies for the development and publishing of generally accepted accounting and reporting principles for tribes. An unintended consequence to the Single Audit Act as amended in 1996 defined Indian tribes as “states” for purposes of the single audit requirements contained in the Act. They are not states. They are sovereigns.
As a result, in 1997, the federal Office of Management and Budget issued Circular A-133 and rescinded Circular A-128. The Office of Management and Budget also issued the Circular A-133 Compliance Supplement. The supplement, updated annually, sets forth the compliance requirements for federal 638 contracts, grants and awards and suggested additional audit procedures for numerous federal programs. The American Institute of Certified Public Accountants also got into the publishing of annual updates to its Audit Guide entitled "Government Auditing Standards and Circular A-133 Audits." The guide provided guidance for financial statement audits performed under Government Auditing Standards and conducted under the Single Audit Act Amendments of 1996 and OMB’s Circular A-133 along with its Compliance Supplements.
Further, in December of 2009, the American Institute of Certified Public Accountants issued its own statement on auditing standards entitled Compliance Audits. This statement applied to all auditors engaged, or legally required, to perform a compliance audit in accordance with generally accepted auditing standards (GAAS), for any governmental audit requirement that required an opinion on compliance (such as the OMB Circular A-133 requirement). In addition they issued a statement on auditing standard (SAS No. 117) requiring the auditor to adapt and apply GAAS, including the risk assessment standards, to a compliance audit and provided guidance on how to do so. It was applicable for any June 30, 2010 year-ending single audits. All these authoritative guides were designed for the CPA who audits the recipients of federal awards.
With all these standard pronouncements along with the organizational-wide audit requirement contained in the Government Accounting Standards Board 34 standards, sovereign tribes now have annual audited financial statements presenting net assets, related footnotes, statements of revenue and expenditures and changes in fund balances and various other supplemental data information contained in the financial statements that for all practical purposes is worthless to any interested user of the sovereign’s financial statement and understandable only by the preparing CPA firm. CPAs and auditors have no other authoritative body to look to for alternative accounting and reporting standards.
For the exception of the management and administration of federal, state contracts, grants and other awards, tribes should be treated as sovereigns, not states, for accounting and reporting purposes. Tribes must move away from organizational wide audits and Government Accounting Standards Board 34 standards. Many tribes do not have an organizational-wide audit requirement in their constitution or bylaws. Some have no annual audit requirements. The organizational-wide audit requirement are only performed because federal and state contracts, grants and awards generally all contain a contract provision stating that an annual audit must be performed in accordance with the Single Audit Act as amended in 1996.
Title 31 Money and Credit, Chapter 75 sets forth the requirement for a single audit. While this chapter defines a tribe as a state, the single audit definition applies only to a non-federal entity. Most all tribes are federally chartered business corporation under the Indian Reorganization Act of 1934 and should not be defined as non-federal entities. Very few Certified Public Accountants define Indian tribes as federal entities for purposes of this Chapter. Therefore they apply the organizational wide audit standard to the work they perform.
Federal and Government Accounting Standards Board 34 accounting and reporting standards do not and will not ever adequately distinguish or measure significant accounting, reporting and compliance differences between the management and administration of federal and state contracts, grants and awards and a tribe’s separately-owned assets, liabilities, tribal members’ equity, self-governance programs and other wholly-owned enterprises such as casinos, convenience stores, mining and other for-profit businesses. Sovereigns are not states. Sovereigns are unique, federally chartered business corporations with unique, inherent powers recognized by the federal government to form their own government structure and delegated congressional powers to manage, own and operate any and all for-profit businesses that promote the health, safety and welfare of their stakeholders, the enrolled members of the Tribe. Such differences in purposes and governance activities require differences in presentation of financial information.
How can these accounting, reporting and compliance differences be recognized? How can individual Tribes move away from the Government Accounting Standards Board? To get to a different accounting and reporting result, Native American Tribes should first be recognized as a Federal Government Sponsored Enterprises. The federal government already recognizes such organization. The federal government established the Federal Accounting Standard Advisory Board (FASAB) in 1990. FASAB was established in after Congress passed the Chief Financial Officer’s Act (CFO Act). The Act required audited financial statements, in accordance with applicable standards, for selected federal reporting entities.
It was a step toward reaching comprehensive audited financial statements of federal agencies. The mission of this Board was to develop generally accepted accounting and reporting principles for federal financial reporting entities. The Federal Accounting Standards Advisory Board (FASAB) recognized such differences when they promulgated accounting and reporting principles for federal government reporting entities.
Don Lake, CEO of N2N Business Services, LLC
If FASAB staff criteria is applied, Native American Tribes defined by federal law as domestic dependant nations, created under the Indian Reorganization Act of 1934 as federally-chartered business corporations should be defined as federal GSEs, not non-federal entities. Sovereign tribes, specifically 638 contracts, carry out the mission of the federal government under the health, safety and welfare provisions contained in various federal treaties. Using indicative and conclusive criteria set forth in a 2011 issue paper, Native American Tribes should more appropriately follow FASAB generally accepted accounting and reporting principles and standards.
How can Native American tribes overcome this accounting and reporting disparity and move away from Government Accounting Standards Board 34? Here is one action plan. First use the inherent corporate powers. Form a separate organizational unit. Create the unit administratively or by corporate resolution. The organizational unit sole purpose is to carry out grant management in accordance with grant management standards set forth in the grantee management standards set forth in Section 276.7 of Title 25 Indian law.
When a separate established organizational unit can now be defined as a separate “audit entity” and can be exempt from an entity-wide or organization-wide audit under Section 7502 (d) (2) of the Single Audit Act. Now come the auditing, reporting and compliance parts.
First for purposes of the audit engagement and scope of the audit, an independent auditor must prepare an engagement letter. The main component of the auditor engagement letter is to the entity to be audited. Require in the arrangement letter that organizational unit is to be audited in accordance with Government Accounting Standards Board 34 auditing standards. Limit the audit scope to the newly organized unit.
Without the audit scope well defined, the auditor will want a tribe to sign an engagement letter requiring a government wide audit to be performed under the Government Accounting Standards Board 34 auditing standards. Do not let that happen.
While all contracts, grants and awards generally contain provisions that require Government Accounting Standards Board standards to be followed in the conduct of the audit, a government wide audit is not required. By limiting the scope to the organizational unit, audit fees will be substantially reduced. As federally recognized sovereigns, tribes do not need to comply with the government wide audit scope unless they are to be engaged accordingly.
J Noonan Company, a certified public accountant, and Donald Lake, (Santee Sioux) CEO of N2N Business Services, LLC, a Native American-owned business, have joint-ventured the development of a Grantee Financial Management Training Guide for Native American Tribes. The Guide covers information on the formation of a separate organizational unit within a Tribe. The guide covers how to adopt a resolution to create a separate organization unit and draft auditor engagement letters for auditing services. The Guide contains a pre-audit Government Accounting Standards Board 34 ”to do” checklist, Sample Government Accounting Standards Board 34 formats for financial statements, statements of Net Assets, footnotes to the financial statement, related supplemental reports such as the schedule of Catalog Domestic Federal Assistance (CDFA). The Guide also covers audit thresholds and scope information of the auditor’s compliance review and how to narrate post-audit responses to audit findings and recommendations along with preparation of a corrective action plans to eliminate future findings.
In addition they have developed a tribal leadership manual and have been promoting an independent standard making body for native sovereigns. It is promoted as TASB (Tribal Accounting Standards Board). This independent accounting and reporting standards board would consist of tribal leaders, tribal treasurers, tribal accounts and independent certified public accountants that are interested in establishing separate accounting and reporting requirements for Tribally owned assets, liabilities and equities of sovereign Tribes. The mission of TASB would be to develop and publish accounting principles and methods that would promote sound financial reporting of separately and tribally owned assets, liabilities and membership equities. TASB would work toward an orderly transition from Government Accounting Standards Board 34 reporting, excluding federal and state contracts, grants and awards, and provide Indian tribes with meaningful accounting and reporting authority to plan, conduct, redesign, and administer programs, services, functions, and activities that meet the financial reporting needs of the individual tribal members who are interested in and could use the information in statements to hold the Tribal entity more accountable in the deployment of its own assets.
For more information about the Guide, related training manuals and services, J. Noonan Company can be reached at 1-605-271-5075 or Jerry@tth.net and Don Lake can be reached at 1-605-695-1229 or firstname.lastname@example.org (www.N2Nbusiness.com).
Donald Lake, Santee Sioux, is CEO of N2N Business Services, LLC. Jerry Noonan is a CPA and co-sponsor of Don Lake's N2N Business Services, LLC.