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HomeMy WebLinkAbout11/18/2008, C5 - IMPLEMENTING STATEMENT OF AUDITING STANDARDS NO. 114: AUDITOR COMMUNICATIONS WITH THE COUNCIL r council M.°�°� 11-18-08 j acenba aepont 1=N..b. C CITY OF SAN LUIS OBI SPO FROM: Bill Statler, Director of Finance& Information Technology Debbie Malicoat, Finance Manager SUBJECT: IMPLEMENTING STATEMENT OF AUDITING STANDARDS NO. 114: AUDITOR COMMUNICATIONS WITH THE COUNCIL CAO RECOMMENDATION Designate the Mayor as the Council's representative in communicating with the City's independent auditors in implementing Statement of Auditing Standards No 114. DISCUSSION Overview Statement on Auditing Standards No. 114 (SAS 114) establishes standards and guidance to independent auditors on matters to be communicated with "those charged with governance." While the concerns that led to SAS 114 surfaced in the private sector, it applies to both private and public sector organizations. In the case of the City, "those charged with governance" under SAS 114 guidelines are Council members. In facilitating candid, two-way communication on audit matters, SAS 114 requires that independent auditors communicate with someone(or group) who represents "those charged with governance." We recommend that the Council designate the Mayor as its representative in assisting the auditors in implementing their professional responsibilities under SAS 114. Background In the wake of well-publicized audit failures along with emerging "best practices" in corporate governance in the private sector, expectations have increased for auditors to communicate directly and candidly with "those charged with governance" regarding findings and issues related to the audit, without management filters. For this reason, the Auditing Standards Board recently adopted SAS 114, which establishes clear requirements for independent auditor communication with "those charged with governance" regarding significant matters related to the audit. In the case of the City, SAS 114 reinforces the concept that the City's independent auditors are accountable to the governing body— the Council—not management. For this reason, it has been the City's longstanding practice that the Council awards all audit contracts; and that all audit reports are addressed to the Council. In best achieving the goals of SAS 114 in a manner that is consistent with State open meeting laws (Brown Act) as well as past City practice, we recommend that the Council designate the Mayor as its representative for SAS 114 communication purposes. This will not change the Council's relationship with the City's independent auditors because: Implementing SAS 114 Page 2 1. The Council as a whole will continue to review and award all audit contracts. 2. The independent auditors will continue to report to the entire Council on the results of the City's financial operations via the Comprehensive Annual Financial Report. 3. Reports from the auditors regarding internal controls will continue to be provided to the entire Council. This change simply provides the auditors with a Council representative to discuss any significant audit related matters in a direct and candid forum in a manner consistent with the Brown Act. Scope of Communications , SAS 114 sets forth the following areas for auditor communication with "those charged with governance:" 1. The auditors' responsibilities under generally accepted auditing standards. (Note: In the City's case, these are clearly set forth in the audit agreement approved by the Council). 2. An overview of the planned scope and timing of the audit. (Again, in the City's case, these are also clearly set forth in the audit agreement approved by the Council.) 3. Any significant findings from the audit. Depending on the circumstances, this could include: the auditors' views about the qualitative aspects of the entity's significant accounting polices, practices and financial statement disclosures, if appropriate; any significant difficulties encountered during the audit; any significant uncorrected misstatements; disagreements with management; and any other findings or issues arising from the audit that, in the auditors' professional judgment, are significant and relevant to "those charged with governance." ALTERNATIVES 1. Form an Audit Committee. Most organizations in the private sector (especially publicly- traded ones) and some in the public sector have established audit committees. In the case of local governments like the City, the Government Finance Officers Association of the United States and Canada (GFOA) recommends as a "best practice" forming an audit committee comprised of a majority of Council members. With this approach of majority governing body membership, audit committees in both the private and public sector are typically authorized to perform a wide range of duties, including audit firm selection and contract execution; and in these cases, they would be strong candidates for representing"those charged with governance"on SAS 114 matters. However, for virtually all significant responsibilities usually covered by audit committees (whether formed of Council majorities or less than a quorum) like auditor selection and receipt of audit reports, we believe that this is best left to the Council as a whole; and this has been the City's longstanding practice. Additionally, this model does not work well for cities � I Implementing SAS 114 Page 3 in California in balancing the SAS 114 goal of two-way, candid communication with open meetings as set forth in the Brown Act. For this reason, cities in California do not have audit committees as envisioned by the GFOA or SAS 114. 2. Do not Formally Designate a Council Representative. SAS 114 does not require "those charged with governance"to formally designate a representative for communication purposes with the auditors. In those cases where an audit committee exists, SAS 114 assumes that the committee will be assigned this task. However, responsibility for identifying who auditors should communicate with based on the criteria set forth in SAS 114 rests with the auditors. Accordingly, the Council is not required to designate a representative. On the other hand, we believe that the goals of SAS 114 will be best met via the continuity and clear assignment of a representative by the Council; and that it makes sense for the Mayor to fulfill this role. CONCURRENCES The City's independent auditors (Glenn, Burdette, Phillips & Bryson) concur with the recommendation to designate an individual as the Council's representative in communications related to the audit. FISCAL IMPACT There are no significant fiscal impacts in implementing this recommendation. T:\Council Agenda Reports\Finance&1T CAR\2008\SAS 114 CAR,I 1-18-08.doc