Loading...
HomeMy WebLinkAboutDocumentation_Audit_Tab 05_10/30/2008No Text AUDITOR SELECTION TASK FORCE Executive Summary Florida law requires local governmental entities (counties, municipalities, and special districts), district school boards, charter schools, and charter technical career centers to provide for annual independent audits by licensed certified public accountants. The process for selecting the independent auditor is specified in Section 218.391, Florida Statutes; however the auditor selection requirements vary according to the type of entity to be audited. The Auditor General's recent report (report No. 2004-006) on the performance audit of the Local Government Financial Reporting System (LGFRS) discusses the results of the Auditor General's review of auditor selection processes in use by local governments. The report indicates that many entities for which the law does not prescribe auditor selection procedures do not use what are considered by the Government Finance Officers Association and National Intergovernmental Audit Forum to be prudent auditor procurement practices, and includes recommendations for improvement in the process. Use of an adequate auditor procurement process helps ensure selection of a qualified auditor and satisfactory audit effort (i.e., audit effort sufficient to disclose significant noncompliance, control deficiencies, or a lack of reasonable and necessary business practices). The task force was formed to assist the Auditor General in evaluating the various methods used by local governments and other entities subject to the audit requirements of Section 218.39, Florida Statutes, and in making recommendations to the Legislature for statutory changes, as appropriate. Task force meetings were held in Orlando, Florida, on September 24, October 23, and November 13, 2003, and on July 27, 2004. A total of 26 individuals designated by various professional organizations to participate on the task force attended one or more of the four task force meetings as follows: Charter Schools Harold Maready Florida Association of Counties Eric Gassman Florida Association of Court Clerks & Controller James B. (Jim) Moye Florida Association of Special Districts Chuck Haas Florida Association of Public Purchasing Officers Rhonda Ledford Elaine Walker Florida Government Finance Officers Association Bill Bogan, Jr. Alan Gaarder Eugene Schiller Florida League of Cities George McGowan Francine Ramaglia Bill Underwood Florida School Finance Officers Association Olga Swinson Florida Institute of Certified Public Accountants Jeff Barbacci Jeanine Bittinger Dave Dennis Jennifer Jankowski Green Richard Law Kelly Leary Ed Leonard Alan Nast Tom Reilly Jack Rowell Jeff Tuscan Mary Young Legislative Auditing Committee Rip Colvin AUDITOR SELECTION TASK FORCE Executive Summary Jim Dwyer and Ted Sauerbeck of the Auditor General's Office coordinated the task force, and prepared this report. This report provides a list of recommendations the task force believes are necessary to ensure that local governmental entities, district school boards, charter schools, and charter technical career centers obtain substantive and effective audits at reasonable costs. The underlying concept of the task force recommendations is to ensure that all such entities use sound auditor selection procedures while leaving sufficient discretion to such entities. The task force believes this can be accomplished through a combination of law changes and educational efforts on the part of the Auditor General and professional associations. 2 AUDITOR SELECTION TASK FORCE Recommendations AUDITOR SELECTION PROCEDURES -GENERAL Task Force Recommendations Do not revise Section 218.391, Florida Statutes, to specify the frequency with which prescribed auditor selection procedures must be used. However, Section 218.391, Florida Statutes, should be revised to: • Clarify that prescribed auditor selection procedures must be used prior to entering into a new contract for audit services; • Clarify that contract renewals may occur without the use of prescribed selection procedures; and • Establish minimum procedures that all entities must use when selecting an auditor while leaving a sufficient amount of discretion to the entities' governing bodies. The proposed revised Section 218.391, Florida Statutes, is shown on Attachment A (some of the changes are addressed in more detail later in this report). Also, Attachment B provides a schedule of the effect of the proposed revised Section 218.391, Florida Statutes, on current requirements for the different types of entities. In addition, statutory requirements should be supplemented with detailed suggested guidance promulgated by the Auditor General or professional associations. Basis for Recommendations Task force members were evenly divided as to whether or not Section 218.391, Florida Statutes, should be revised to require periodic use of sound auditor selection procedures (i.e., to specify the frequency with which auditor selection procedures should be used). Many task force members believe it is prudent to use the procedures at least every 5 years; however, many also believe the statute should not dictate how frequently the procedures should be used as this should be left to the entity's discretion. The majority of task force members believe that Section 218.391, Florida Statutes, should be revised to clarify that the auditor selection procedures must be used prior to entering into a new contract (this is currently required as indicated by an Attorney General opinion, but many entities are not aware of this) and to address contract renewals. The majority of task force members also believe that Section 218.391, Florida Statutes, should be revised to specify the minimum procedures to be followed by all entities when selecting an auditor for one or more of the following reasons: • It will help ensure that all entities use an adequate auditor procurement process to increase the probability of a satisfactory audit; • It will help ensure that entities that are not currently using prudent auditor procurement practices will do so; and 3 AUDITOR SELECTION TASK FORCE Recommendations • From the standpoint of ensuring an adequate audit, there is no reasonable justification for requiring some entities (district school boards and noncharter counties), but not other entities (charter counties, municipalities, special districts, charter schools, and charter technical career centers), to use prescribed procedures. During the course of the task force meetings, there was much discussion as to what procedures all entities should be required to follow when selecting an auditor. The majority of task force members believe that statutory requirements regarding auditor selection should be supplemented with detailed suggested guidance provided by the Auditor General or appropriate professional associations, and that the following minimum procedures should be required of all entities: • Publicly announce the need for audit services, although the method of announcement should be left to the entity's discretion; • Establish factors to use for evaluating audit firms, although the factors should be left to the entity's discretion (see further discussion on page S of this report); • Provide interested audit firms with a request for proposal, although the format and content of the request for proposal should be left to the entity's discretion (see further discussion on page 9 of this report); • Verify that audit firms recommended for consideration by the governing body are properly licensed by the State Board of Accountancy; and • Use written agreements that embody all provisions and conditions of the procurement of audit services (see further discussion on page 10 of this report). There was discussion regarding the fact that many small municipalities and special districts don't have sufficient staff, or any staff, necessary to use the prescribed minimum auditor selection procedures. The Legislature, in establishing audit thresholds, has already taken into account the cost and burden that result from having to procure auditing services to provide for an audit. In addition, the majority of task force members believe that entities lacking sufficient staff would have full authority to utilize another entity to apply the auditor selection procedures although the entity's governing body ultimately would be responsible for selecting the auditor. The majority of task force members also believe that the identified minimum selection procedures should not be overly burdensome to an entity as the entity still has much discretion as to how the procedures are to be accomplished, and how often the procedures are to be applied. 4 AUDITOR SELECTION TASK FORCE Recommendations RANKING AUDIT FIRMS AND NEGOTIATING FEES Task Force Recommendations Section 218.391, Florida Statutes, should be revised to: • Allow all entities the choice of considering fees during the process of ranking audit firms or during the process of negotiating with ranked firms; • Allow all entities discretion as to what factors should be used to rank audit firms with the exception of some key factors that should be required to be evaluated. However, although such factors may include compensation, entities should not be permitted to use compensation as the sole or predominant reason for selecting an audit firm; and • Allow all entities discretion as to what method to use in negotiating a contract with an audit firm if the entity ensures that the agreed-upon compensation is reasonable to ensure that sufficient audit effort will be expended to satisfy the requirements of s. 218.39 and the needs of the governing body. Noncharter counties and district school boards should no longer be required to use the "1-2-3" approach. See proposed revised Sections 218.391(3) through (5), Florida Statutes, on Attachment A. Basis for Recommendations Task force members were evenly divided as to whether or not Section 218.391, Florida Statutes, should be revised to allow entities to consider fees in ranking audit firms. Some task force members believe that fees should be considered as part of the process of ranking the firms, as long as fees was only one of several factors and was not heavily weighted. However, several task force members expressed concern that those ranking the firms would be biased by the fees in their evaluation of the other factors and indicated that fees should be considered only when negotiating with firms ranked based on qualifications and performance data. The majority of task force members believe that with the exception of certain key factors, the factors to be used in ranking audit firms should be left to the discretion of the entity and, as such, the entity should be permitted to use fees as a ranking criterion (during the task force meetings, several factors that should be recommended, but not required by law, were identified). However, the majority of task force members also believe placing too much emphasis on fees, or failing to ensure that the proposed fee will result in sufficient audit effort, diminishes the probability of an adequate audit. As pointed out in audit report No. 2004-006 (Finding No. 2), the Auditor General's LGFRS performance audit disclosed several instances in which fees were the sole or most heavily weighted factor used to select a firm (this was noted for 10 (24%) of 42 entities reviewed that used a competitive selection process). 5 AUDITOR SELECTION TASK FORCE Recommendations Ultimately, the majority of task force members agreed that fees are an important part of the process of selecting the auditor, but that Section 218.391, Florida Statutes, should not permit entities to use fees as the sole or predominant reason for selecting an audit firm. Inevitably, the discussion about fees led to discussion about the method in which the entity should negotiate the fees. Task force members were evenly divided as to whether the "1-2-3" approach (currently required only for noncharter counties and district school boards) or other approaches should be used. During discussion at the task force meetings, it was brought out that the "1-2-3" approach is not infallible, and can be manipulated so that fees become the predominant factor, and several task force members disclosed reasons why the "1-2-3" approach may not be the best approach, including the possibility that it could result in the selection of a firm that costs more than it would have cost had the simultaneous or other approach been used. As the "1-2-3" method does not appear to be a clearly preferred method for negotiating fees, there does not appear to be a reason why noncharter counties and district school boards should be required to use the "1-2-3" approach. While most of the task force favor either (1) the " 1-2-3" approach or (2) ranking firms using compensation as one of the factors and then selecting the firm ranked first, there may be alternative methods that are effective so long as the entity ensures that the agreed-upon compensation is reasonable to ensure that sufficient audit effort will be expended to satisfy the requirements of s. 218.39 and the needs of the governing body. 6 AUDITOR SELECTION TASK FORCE Recommendations AUDITOR SELECTION/AUDIT COMMITTEES Task Force Recommendations Do not revise Section 218.391, Florida Statutes, to require use of audit committees in the manner as contemplated by the Government Finance Officers Association (GFOA). In addition, the Auditor General or professional associations should promulgate suggested guidance regarding potential uses of, and composition of, audit committees. Also, Section 218.391, Florida Statutes, should be revised to allow county constitutional officers, like the board of county commissioners, to have a designee on the noncharter county auditor selection committee, and to allow for the possibility of having other individuals serve on the committee (it would be advisable to consult with appropriate county-related professional associations regarding this proposed change). See proposed revised Section 218.391(2), Florida Statutes, on Attachment A. Basis for Recommendations There was much discussion regarding the potential use of audit committees as contemplated by the GFOA. For purposes of the task force, audit committee means a committee used in a broader role than an auditor selection committee that would be responsible for all aspects of audit management, including monitoring the audit, evaluating auditor performance, and ensuring that management has implemented corrective actions addressing all audit findings. Many task force members believe that using audit committees to be involved in all aspects of the audit, rather than just the auditor selection, had merit (several of those merits were pointed out in the Auditor General's report No. 2004-006, Finding No. 3), and it was discovered that some of the members' organizations used audit committees. Further, a random survey of local governments that use audit committees with external membership disclosed that the vast majority of the respondents were satisfied with the committee's performance and did not experience problems with selecting individuals to be on the committee. However, concerns expressed by some task force members about the use of such committees included the following: • An audit committee composed of individuals not on the governing body of the entity could result in the governing body not being involved enough in the audit process; • It may be difficult to find individuals who are qualified and willing to serve on the committee; • Depending on how individuals are appointed to serve on the committee, there exists the possibility that such individuals may not be independent; and • Imposing a requirement to use an audit committee could be burdensome on small local governments. The majority of task force members agreed that the use of an audit committee should not be required, but believe Section 218.391, Florida Statutes, should be revised to permit .entities to use audit committees for other purposes (such as monitoring the progress of the audit and evaluating the audit 7 AUDITOR SELECTION TASK FORCE Recommendations firm's performance). The task force members agreed that entities need to be educated as to the benefits of audit committees and that this could be accomplished by the Auditor General or professional associations promulgating suggested guidance regarding potential uses of, and composition of, audit committees. During the course of the task force meetings, some members indicated they believe that county constitutional officers, like the board of county commissioners, should be permitted to have a designee, and that the law should allow for the possibility of having others on the committee (e.g., citizens). The majority of task force members believe that Section 218.391, Florida Statutes, should be revised to permit county officers elected pursuant to Article VIII, Section 1(d) of the State Constitution, to have a designee on the committee and to permit noncharter counties to include individuals other than county officers and a member of the board of county commissioners. 8 AUDITOR SELECTION TASK FORCE Recommendations REQUESTS FOR PROPOSALS Task Force Recommendations Revise Section 218.391, Florida Statutes, to require the use of a request for proposal (RFP), but allow entities discretion as to what information is to be included in the RFP. See proposed revised Section 218.391(3)(c), Florida Statutes, on Attachment A. In addition, the Auditor General or professional associations should promulgate suggested guidance regarding the use of RFPs and elements that should be included in RFPs. Basis for Recommendations 'The Government Finance Officers Association (GFOA) recommends the use of an RFP to ensure that entity obtains sufficient information needed to evaluate the auditor's qualifications and that the auditors are provided with sufficient information needed to submit a proposal. The GFOA's Audit Management Handbook includes 24 different elements that should be included in the RFP. The majority of task force members were in favor of the required use of RFPs. In addition, many task force members believe that Section 218.391, Florida Statutes, should be revised to specify the minimum elements to be included in the RFP, if an RFP was required. However, several task force members expressed concern about dictating in the statute precisely what elements should be included in the RFP, while others were concerned that mandating the content of the RFP would be overly burdensome for smaller local governments. Ultimately, the majority of task force members agreed that the RFP was a vital component of an adequate auditor selection process, and the required use of an RFP would not be overly burdensome if the entity was allowed discretion as to what information to include in the RFP. The majority of task force members believe that Section 218.391, Florida Statutes, should be revised to require entities to provide interested audit firms with a request for proposal, but the format and content of the request for proposal should be left to the entity's discretion. Recognizing the importance of a properly designed RFP, and the need for uniformity to the extent possible in RFPs so as to encourage auditors to respond to RFPs, the majority of task force members agreed that the Auditor General or professional associations should promulgate suggested guidance regarding the use of RFPs and elements that should be included in RFPs. In addition, it was noted that the Florida GFOA has been accumulating sample RFPs and placing them on its web site, and such efforts should be continued. 9 AUDITOR SELECTION TASK FORCE Recommendations WRITTEN CONTRACTS Task Force Recommendations Revise Section 218.391, Florida Statutes, to require the use of a written contract, but allow entities discretion as to what information is to be included in the written contract with the exception of a few key elements that should be required. See proposed new Sections 218.391(7) and (8), Florida Statutes, on Attachment A. In addition, the Auditor General or professional associations should promulgate suggested guidance regarding the use of written contracts and elements that should be included in written contracts. Basis for Recommendations The Government Finance Officers Association (GFOA) recommends the use of a written contract as a key component of a sound auditor procurement process, and its Audit Management Handbook includes numerous elements that should be included in the written contract. Further, the Auditor General has on numerous occasions in reports on audits of local governments recommended the use of written contracts as a good business practice. In addition, the Legislature has recognized the importance of a written contract as evidenced by Section 287.058, Florida Statutes, which requires the use of written contracts by State agencies in procuring contractual services. The majority of task force members believe that Section 218.391, Florida Statutes, should be revised to require entities to use written agreements that embody all provisions and conditions of the procurement of audit services. As was the case for RFPs, some members expressed concern about dictating in the statute precisely what the elements should be included in the written contract. While most task force members do not believe that Section 218.391, Florida Statutes, should prescribe all elements to be included in the written contract, the majority of task force members believe Section 218.391, Florida Statutes, should require the written contract to address the services to be provided and fees or other compensation for such services, and to specify the time period covered by the contract and conditions under which the contract may be terminated. The majority of task force members also believe the written contract should address the extent to which the contract may be renewed. Another key element is a provision requiring that invoices for fees or other compensation for services or expenses be submitted in sufficient detail. The Legislature has recognized the importance of this element as evidenced by Section 287.058(1)(a), Florida Statutes, which pertains to contracts to be used by State agencies in procuring contractual services. The need for this provision is further illustrated by the numerous instances in which the Auditor General has reported, in connection with audits of local governments, payments made to contractors without benefit of a detailed invoice precluding a determination as to the propriety of the payment. io AUDITOR SELECTION TASK FORCE Recommendations The majority of task force members agreed that Section 218.391, Florida Statutes, should require that written contracts require the submittal of invoices for fees and other compensation. The majority of task force members also agreed that a written contract may include an engagement letter signed and executed by both parties. Recognizing the importance of a properly designed written contract, the task force consensus was that the Auditor General or professional associations should promulgate suggested guidance regarding the use of written contracts and elements that should be included in written contracts. In addition, it was noted that the Florida GFOA has been attempting to accumulate sample written contracts to place on its web site, and such efforts should be continued. ~1