Auxiliary Organization External Auditor Qualifications. Sedong John, Director, Systemwide Financial Standards & Reporting

Transcription

1 Auxiliary Organization External Auditor Qualifications Sedong John, Director, Systemwide Financial Standards & Reporting AOA Annual Conference, January 16, 2013

2 Why Establish Standards for Audit Firm Qualifications? To facilitate auxiliary organizations audit firm selection process by developing standards to ensure auxiliary organizations are contracting with audit firms that possess industry specific proficiencies and experience to best evaluate management s assertions in the financial statements To bring all components of the CSU financial statements to equal standards and improve consistency across the system 2

3 Statutory Requirements for Auxiliary Organization Financial Reporting As described in Education Code and California Code of Regulations Title 5 Section 42408, both the auxiliary organization s governing board the CSU have responsibility for facilitating annual fiscal audits by external auditors. 3

4 Statutory Requirements for Auxiliary Organization Financial Reporting (cont d) CCR Title 5 states: Each auxiliary organization shall have an annual fiscal audit performed by a certified public accountant selected by the auxiliary organization. When completed, the audit shall be furnished to the Chancellor or designee on the date or dates designated by the Chancellor or designee. The annual fiscal audits shall be performed in accordance with standard systemwide procedures prescribed by the Chancellor. 4

5 Statutory Requirements for Auxiliary Organization Financial Reporting (cont d) Government Code Section (c) requires a systemwide annual financial statement audit in accordance with GAAP. GAAP (GASB 14, 34, 61) requires inclusion of auxiliary organizations in the CSU financial statements as part of the reporting entity (i.e., component units). GC Section (c)(2) requires summary information on related party transactions between campuses and auxiliary organizations as an addendum to the CSU financial statements. 5

6 Unique Complexity of CSU Auxiliary Organizations On-going Chancellor s Office guidance over related-party transactions between the auxiliary organizations and the CSU campuses; Both Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) reporting elements; Significant investment portfolios and commercial operations; and State and Federal government audit requirements. 6

7 Auxiliary Organization External Audit Firm Qualifications Defined in ICSUAM The policy was issued in November, 2011, to be effective beginning with the 2011/12 fiscal year audit. Revised in June, The document is available at shtml. 7

8 Standard Systemwide Procedures Government Auditing Standards: The CSU s financial statements are required to be audited in accordance with Government Auditing Standards (GAS: aka The Yellow Book). Auxiliary organizations financial statements should also be audited in accordance with GAS since they are incorporated into the CSU systemwide financial statements. 8

9 Standard Systemwide Procedures Government Auditing Standards (cont d): GAS incorporates GAAS, plus some additional requirements: Additions to field work and reporting standards (audit planning, opinion, reports on overall compliance and internal control) Specific CPE requirements for each auditor assigned to the audit 9

10 Not-for-Profit Audit (FASB and GASB) experience: The CPA firm must demonstrate experience in auditing 501(c)3 Not-for-Profit organizations, as each of the auxiliary organizations is a 501(c)3 organization. Old: At least 10 not-for-profit organizations currently being audited in California including 5 GASB organizations 10

11 Not-for-Profit Audit (FASB and GASB) experience (cont d): Revised: A sufficient number of not-for-profit organizations currently being audited in California including best examples of both FASB and GASB clients. If the CPA firm does not currently have GASB clients, provide evidence that the firm has sufficient knowledge of GASB requirements and experience to audit both FASB and GASB organizations (e.g., recent GASB clients, previous GASB audit experience and training of auditors assigned to the audit). 11

12 Not-for-Profit Audit (FASB and GASB) experience (cont d): The audit firm must demonstrate experience in auditing both FASB and GASB organizations as the auxiliary organizations are required to report in a GASB reporting format for inclusion in the CSU systemwide financial statements. 12

13 Not-for-Profit Audit (FASB and GASB) experience (cont d): If the auxiliary organization is subject to the A-133 requirements, the auditor must have at least 5 A- 133 clients audited in the last three years. 13

14 Not-for-Profit Audit (FASB and GASB) experience (cont d): The not-for-profit audit experience should be met by the CPA firm s office that will perform the audit, if the CPA firm has multiple offices. The auxiliary organization should evaluate the audit firm to determine whether the firm s experience is relevant to the operations of the specific auxiliary organization being audited. 14

15 Not-for-Profit Accounting Proficiency Proficiency in both FASB and GASB accounting and reporting requirements related to Not-for-Profit Organizations and Public Universities; The CO will review the sample non-csu financial statements recently audited by the firm. 15

16 Not-for-Profit Accounting Proficiency (cont d) New: The CO will review auxiliary organizations financial statements for proper implementation of new accounting pronouncements and correct conversion of FASB financial statements to a GASB format in the supplementary schedule as well as consistency in the quality of the financial statements. 16

17 Common misunderstanding: Please note that GAS and GASB are two different dimensions since GAS relates to auditing standards, whereas GASB relates to accounting principles. Having audit experience under GAS does not necessarily mean understanding of GASB requirements since one can audit FASB financial statements using GAS without knowing GASB requirements. 17

18 Accounting Pronouncements FASB GASB Auditing Standards GAGAS (GAS) GAAS Additional Requirements 18

19 Criteria for GASB organizations (per AICPA Audit and Accounting Guides): An organization must follow GASB rules if at least one of the following is met: a. Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization's governing body by officials of a governmental entity b. The potential for unilateral dissolution by a government with the net assets reverting to a government c. The power to enact and enforce a tax levy 19

20 References: The audit firm is required to provide to the auxiliary organization (not to the CO) no fewer than three but preferably five references from current not-for-profit audit clients. The auxiliary organization should check the references for each of the not-for-profit organizations provided, assessing the organizations perceived satisfaction and technical expertise of the audit firm. 20

21 Training and Education: The auditors of auxiliary organizations are required to attend the annual training conducted by the Chancellor s Office. The purpose of the training is not general technical training, but is to address CSU-specific items such as unique events and reporting requirements of the California State University and its auxiliary organizations. 21

22 Peer Review: The audit firm is required to demonstrate that it has completed a Peer Review in the most recent three years and received an unqualified opinion on the review. 22

23 Chancellor s Office Review: The campus Chief Financial Officer is required to submit to the CO by April 30th (prior to signing an audit engagement) of each year the written evaluation questionnaire for the external audit firm selected by the auxiliary organizations using the Qualifications Review Questionnaire document. 23

24 Documents to be Submitted to the CO by April 30 each year. Submission for First Time Review Qualifications Review Questionnaire completed and properly signed Most recent Peer Review Report Copy of non-csu financial statements 24

25 Documents to be Submitted to the CO by April 30 each year (cont d). Continuation of the Same CPA Firm Previously Approved for the Audit Contract Confirm the audit firm continues to maintain the qualification standards during the audit engagement. Check the box at the bottom of the 1 st page of the Qualifications Review Questionnaire. Sign the certification page. No need to complete the rest of the Questionnaire 25

26 Documents to be Submitted to the CO by April 30 each year (cont d). Results of the review of the Questionnaire: There were 24 CPA firms auditing 92 auxiliary organizations in the CSU system. Of the 24 CPA firms, 6 received conditional pass based on the revised language in the ICSUAM (In the initial evaluation prior to the revision, 7 CPA firms received either conditional pass or no pass). 26