Audit Committee Performance Evaluations

“I don’t think there’s a company, a management, an audit committee that hasn’t gone back and re-looked at what they’re doing … People are really scrutinizing and (want to) really make sure their houses are in order and clean.”  — William Esrey, Sprint CEO

 

July 1, 2014, was the effective date of New York’s Non-Profit Revitalization Act (NPRA) of 2013. However, as most nonprofits know, the state passed this legislation, signed by Gov. Cuomo in December 2013, without issuing implementing regulations. The failure to issue detailed regulations and guidance created a fair amount of confusion and difficulty for nonprofits to comply fully with the requirements of the act. 

 

As a result, the majority of nonprofit organizations have done the best job they can, based on guidance provided to date, in complying with NPRA requirements. Fortunately, the state attorney general and its Charities Bureau recognize that further interpretive guidance was required to further allow organizations to achieve full compliance. 

 

The 73 pages of legislation had nothing to do with revitalization. The primary focus was on the following areas:

- Conflicts of interest

- Related party transactions

- Executive compensation

- Internal controls and accountability

 

In the past five months, the attorney general has fortunately responded to questions and inquiries from tax-exempt organizations, their lawyers, and accountants. In fact, five separate administrative memorandums have been issued providing further guidance in the following areas:

- Audit Committees and the Nonprofit Revitalization Act of 2013 (Feb. 24, 2015)

- Procedures for Forming and Changing a New York Not-for-Profit Corporation (Feb. 24, 2015)

- Internal Controls and Financial Accountability for Not-for-Profit Boards (April 13, 2015)

- Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 (April 13, 2015)

- Whistleblower Policies Under the Nonprofit Revitalization Act of 2013 (April 13, 2015)

 

For these and further updates, you can visit the website: http://www.charitiesnys.com/nonprofit_rev_act_guidance.jsp

 

One of the key focus areas of the NPRA was increasing the responsibilities and requirements for audit committees of tax-exempt organizations comprised of “independent” board members. 

 

This column focuses on one of the many specific requirements assigned to the audit committee. Specifically, the audit committee is now responsible for evaluating and documenting the performance of the audit firm on an annual basis. This requirement is difficult to accomplish without some guidance from an auditor. That auditor would be me. I am hopeful that you agree with the guidance that follows.

 

My colleagues and I have developed an electronic template that provides specific guidance to audit committees in fulfilling their fiduciary role related to auditor performance evaluation.

 

Evaluation of auditors from a board volunteer perspective is inherently difficult. Therefore, the following questions should be answered by the committee. We also recommend that senior management, particularly the CEO and CFO, should complete this questionnaire as well. Any “no” answer requires follow-up and, preferably, direct conversation with the audit partner. 

 

1. To the independent audit firm and the personnel assigned to the audit have significant background and experience in the industry / service sector of our organization?

 

2. Does senior management, particularly the CEO, CFO, and compliance officer, believe that the independent auditors have been sufficiently thorough in their audit scope, approach, and testing?

 

3. Do board / audit committee members believe that the independent auditors have been sufficiently thorough in their audit scope, approach, and testing?

 

4. Do the board / audit committee members believe that the independent auditor has and continues to maintain a transparent and candid relationship with board leadership, particularly with respect to the value and clarity associated with independent auditor presentations to the full board and audit committee?

 

5. Has the audit committee inquired of the independent auditor and obtained a copy of the most recent Peer Review letter together with any findings?

 

6. Has the audit committee ensured that the audit firm peer-review letter is dated within the last three years?

 

7. Has the audit committee verified that the auditor is independent from the organization by evaluating the amount of consulting / advisory fees in relation to the audit fee arrangement?

 

8. Were the audited financial statements presented in a timely basis and issued by the auditor in an appropriate timeframe following the audit-committee presentation? 

 

9. Was the auditor’s presentation of the audit results clear, informative, and understandable to audit-committee members?

 

10. On an overall basis, do the board / audit committee / management team members believe that the independent audit firm provides a thorough and technically correct set of report deliverables, while at the same time providing value-added observations and recommendations at a fair and reasonable cost?

 

These questions should be answered after the audit presentation and the required executive session between the “independent” audit committee members and documented as an addendum to the audit-committee minutes. 

 

The world of nonprofit auditing and financial reporting has steadily increased in complexity over my 35-year career. An audit committee must understand that simply being a CPA firm does not necessarily qualify you as a capable auditor of tax-exempt organizations. For this reason, I, and hopefully my competitors, welcome the required scrutiny of an audit-committee evaluation of auditor performance on an annual basis. 

 

The auditor performance-evaluation requirement is just one of many NPRA requirements that have been assigned to the audit committee. The primary additional requirements include, but are not limited to, the following:

- Oversight and review of conflict-of-interest policy and related disclosure statements

- Review and recommendation related to specific conflict-of-interest transactions

- Review and recommendation regarding each related-party transaction

- Evaluate the performance of the auditors

- Ensure compensation-committee compliance

- Determination of “independent” vs. “non-independent” directors

 

It is considered to be a best practice for the audit committee minutes to document that the above responsibilities have been completed with the following attestation documented in the minutes: “The audit committee hereby documents that it has fulfilled its responsibilities related to review, oversight, and approval of the areas listed above during the fiscal year ended xx/yy/zzzz.

 

If your organization is not yet fully compliant with the NPRA, don’t despair. Both the attorney general’s office and the Charities Bureau have acknowledged that tax-exempt organizations will need to continue to address and modify policies and procedures as additional interpretive guidance is issued by their offices. Having said that, every nonprofit organization should have a goal of substantially complete compliance with the NPRA no later than Dec. 31, 2015. 

 

If you would like a copy of our electronic template, please email me at the address below.                       

 

Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at garchibald@bonadio.com