Audit committees that work: a properly constituted audit committee is an important tool for ensuring the independence of the external auditor and thus the reliability of the financial statement audit.
AN EVOLVING PROCESS
For Douglas County, Nebraska, the process of establishing an audit committee and strengthening its role in the government has been a continually evolving one. Until 1995, the clerk/comptroller (an elected official) and the fiscal administrator (appointed by the Board of County Commissioners) were responsible for initiating and overseeing the audit procurement process, monitoring the performance of the external auditor, and reviewing and responding to audit comments from both the external and internal auditors. In 1995, the comptroller requested formal action by the Board of Commissioners to approve the establishment of an audit committee that would have broad oversight over these functions.
When the original committee was established, its members included the chair and vice chair of the Board of Commissioners, comptroller, treasurer, fiscal administrator, chief administrative officer, and chief deputy county clerk. The committee oversaw the development and award of the RFP for the county's annual audit. However, because of political impediments resulting from the composition of its membership, the committee was often unable to agree as to how to proceed with recommendations from both external and internal auditors. As a result, the audit committee as formed by the 1995 resolution informally suspended its activities.
With the promulgation of GFOA's 1997 recommended practice on audit committees, the comptroller sought and obtained the approval of the Board of Commissioners to re-activate the audit committee and to change its composition. The recommended practice provided guidance on the structure and duties of an audit committee. It also reinforced the idea that an audit committee enhances auditor independence and hence the reliability of the financial statement audit.
Establishment of Audit Committees specifically recommends that a majority of the members of an audit committee should be selected from outside of management and that the committee should include representatives of the executive and legislative branches of government. To comply with this guidance, the structure of the county's audit committee was subsequently changed to include the comptroller, fiscal administrator, and three accounting professionals from the corporate and/or educational community (one with a specialization in information systems auditing).
ROLES, RESPONSIBILITIES, AND RESULTS
The audit committee supervises the development of the county's RFP for external audit services. The committee members play an active role in the RFP development process to ensure that all necessary requirements are included, particularly those related to recent GASB pronouncements. After the RFP is issued, the committee reviews all submitted bids and selects an audit firm for recommendation to the Board of Commissioners for approval. The committee will begin development of an RFP for the next cycle of a multi-year audit contract this year.
The audit committee also reviews the annual financial statements, management letter comments, and any recommendations made by the external auditors. The committee discusses and approves corrective actions, and makes recommendations to the governing body based on the requirements of those corrective actions. In some eases, the committee may recommend that the Internal Audit Division either assist county departments in complying with the auditor's recommendations or further explore issues presented in management letter comments or in the external auditor's recommendations.
In the event that the county requires services outside of the scope of the annual external audit, the audit committee serves as a review board. Audit Procurement recommends that "any significant nonaudit services should always be approved in advance by a governmental entity's audit committee." In deciding whether to approve the engagement of the external auditor for nonaudit services, the audit committee considers the government's needs, as well as the possibility of using alternative service providers. One example of a committee-approved use of the external auditor for nonaudit services was a review of the county's indirect cost allocation plan.
The Douglas County audit committee also has the duty, by virtue of the resolution that approved its formation, to review and approve the Internal Audit Division's annual work plan. This provides for an independent review and endorsement of the plan's objectives, eliminating concerns about potential political motivation for the Internal Audit Division's activities. Review and approval of the work plan by the audit committee also provides for an outside assessment of the available resources in relation to the proposed plan. The audit committee reviews all audits and special reports issued by the internal auditors, including the required follow-up reports, in accordance with the standards of the Institute of Internal Auditors. The committee also helps vet special requests by county officers and department heads for the assistance of the Internal Audit Division.
Finally, the audit committee has developed administrative policies--adopted by the Board of Commissioners--governing requests for internal audit assistance, credit card and cellular phone usage, purchasing guidelines, and formal procedures for terminating employees.
GFOA's recommended practices on audit committees and audit procurement have proved very beneficial to Douglas County. The practices offer logical, documented processes to guide the formation of audit committees and the procurement of audit services. By taking this guidance to heart, Douglas County has strengthened its audit management efforts and, as a result, has addressed business process and management issues in ways that have improved county services.
Excerpts from GFOA Recommended Practices on Audit Committees
Establishment of Audit Committees (1997 and 2002)
* Formally establish by charter, enabling resolution, or other appropriate legal means
* Appoint members from outside of the government
* Clearly delineate the duties of the audit committee, with primary emphasis on the oversight of the independent audit of the government's financial statements
* Require the audit committee to report annually on its activities to the governing body
Audit Procurement (1996 and 2002)
* Establish the scope of the independent audit of financial statements under the direction of the audit committee
* Enter into multi-year contracts of at least five years for the services of independent auditors, using a competitive bidding process to select the auditor
KATHLEEN A. HALL is chief deputy county clerk for Douglas County, Nebraska. She serves on GFOA's Committee on Accounting, Auditing, and Financial Reporting.
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|Title Annotation:||Best Practices|
|Author:||Hall, Kathleen A.|
|Publication:||Government Finance Review|
|Date:||Aug 1, 2003|
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