Thursday, February 25, 2010

When "ADEQUATE" is the Best That You Can Be

Many times during our years as Government auditors we would sit down with contractor representatives after finishing an audit of one or more of their internal control systems and proclaim that their system was "adequate".

"Adequate!, only adequate?" was a typical response. "We've done this and we've done that, we have great policies and procedures, we have superb controls with internal reviews and other checks and balances. We train everyone, as we should. How can you say that our system(s) are only adequate?"

We would then explain that "adequate" was as good as it gets. Under Generally Accepted Government Auditing Statndards (GAGAS), an internal control system is declared "adequate" when no significant deficiencies are found. The alternative would be either a significant deficiency or a material weakness.

A significant deficiency in internal control system is a deficiency that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with Generally Accepted Accounting Principles (GAAP) such that there is more than a remote likelihood that a misstatement will not be prevented or detected.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement will not be prevented or detected.

Get used to the terminology. "Adequate" is good. Anything else is bad.

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