March 5, 1993
The Honorable Ralph Campbell, Jr. State Auditor Office of the State Auditor 300 N. Salisbury Street Raleigh, North Carolina 27603-5903
Re: Advisory Opinion on Conflict of Interest; N.C.G.S. §147-64.12(b)
Dear Auditor Campbell:
Your letter to the Attorney General concerning the applicability of the conflict of interest provisions of N.C.G.S. §147-64.12(b) to your administration as State Auditor has been referred to us for a response.
As we understand the relevant facts underlying your request, you served as the Administrative Officer for the North Carolina Department of Insurance immediately prior to taking office as State Auditor. Your responsibilities in that position related to matters affecting the entire Department.
One of the duties of the Auditor is to audit the Comprehensive Annual Financial Report (CAFR), the financial report for state government as a whole. Financial statements of state agencies are components of the CAFR. The Auditor reviews the combined statements and conducts the audit procedures deemed necessary by him to determine whether the financial statements are free from material misstatements. In the past, the Auditor’s office has done limited test work at the Department of Insurance in order to express an opinion on the comprehensive financial statements.
Another responsibility of the Auditor is to audit federal financial assistance programs and to issue a Single Audit Report (SAR). The SAR is used by the federal government to determine whether state agencies that have received federal monies have complied with applicable laws and regulations. The SAR work for the Department of Insurance has been limited to approximately eight hours for review of a schedule of federal funds received by the Department because the Department does not have a major federal financial assistance program. The internal control structure of the Department has also been reviewed on a periodic basis.
These facts have raised the following three questions:
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