What Suggested Specific Activities or Duties Should an Audit Committee Undertake to Maximize its Effectiveness and Contribution to the Organization in Light of its Responsibilities?
Independence
An awareness of the independence rules is essential to maintaining audit committee independence. To that end, we recommend 1) that audit committees and the organizations they serve work with their legal counsel to develop a process whereby independence rules are communicated on a regular basis, and 2) audit committee members annually confirm their independence in writing. Many organizations regularly circulate a questionnaire to audit committee members that asks detailed questions to enable members to assess and confirm their independence. Often, an explanation of the independence rules is attached to these questionnaires.
Responsibilities Relating to Public Accounting Firms
Evaluating the capabilities of auditors
The audit committee is considered the public accounting firm’s “client” with the responsibility to hire and fire, pre-approve services, review compensation and conduct regular communications with the auditors. In deciding whether to retain and, as applicable, recommend ratification of the auditors, the audit committee should consider a number of factors that impact the auditors’ capabilities in the context of the organization’s needs. Refer to the chart below which outlines BDO’s recommended considerations to be made by audit committees.
In addition, the AICPA’s Audit Committee Toolkit: Not-for-Profit Organizations, 2nd Edition contains a practice aid entitled, Evaluating the External Auditors: Questions to Consider, for further reference. The toolkit is available for purchase and accessible from the AICPA’s Audit Committee Effectiveness Center.1
Pre-approval of services by audit committees
Audit committees should consider the need to pre-approve all audit and permitted non-audit services.
The audit committee can either approve a service (1) directly before the accountant is engaged, or (2) indirectly via pre-approval policies and procedures it establishes.
An organization may designate one or more audit committee members who are independent to pre-approve services and report these decisions to the full audit committee at each of its scheduled meetings.
As part of its initial and continuing evaluation of the capabilities of its auditors, we suggest that audit committees consider the following:
| Specific Consideration | Questions to Ask |
|---|---|
| Technical, industry and nonprofit organization reporting knowledge and depth, including geographic reach and specific type of nonprofit (e.g., trade association, school, etc.) | Does the firm have experienced staff and depth of resources to handle the complexity of accounting, reporting and tax matters (including the greatly revised Form 990, unrelated business income tax and exempt status issues) required in today’s environment and as it relates specifically to the organization’s industry, operations and business? Does the firm participate in industry-related forums (specifically with regard to financial, accounting, reporting and tax matters) that have input into the evolving accounting and reporting practices and guidance? Does the firm have the geographic reach necessary to service the organization fully and efficiently? |
| Independence | What are the firm’s policies and procedures for ensuring independence of its partners and personnel with respect to the organization? Does the firm, in conjunction with the organization’s operating environment, have adequate mechanisms in place to ensure that independence violations (e.g., with respect to employment of former audit engagement team members, pre-approval of services, etc.) do not occur? |
| Quality control policies and procedures | Does the firm have adequate quality control policies and procedures in place to ensure services rendered meet professional and regulatory requirements as well as client expectations? What incremental policies and procedures, above those required by professional and regulatory requirements, does the firm employ to provide added quality in the process of rendering professional services? |
| Engagement team composition | What is the ratio of staff to partners, and staff to partners plus senior managers? How does the audit firm manage continuity on engagements? What are some of the metrics that the firm uses to monitor performance of its engagement team members? |
| Training and technical support | What are the firm’s professional credentials (breadth, depth and presence of national office providing support internally)? How does the firm prepare its personnel with respect to meeting professional standards and servicing clients? How does the firm ensure its professional personnel remain up-to-date on evolving technical rules? |
| Frequent and meaningful communications and interactions with audit committees and management | What methods and tools does the firm employ to ensure frequent, meaningful communications and interactions with the audit committee and management? More specifically, how does the firm ensure that all required communications occur between the auditors and the audit committee? What programs does the firm have in place to help audit committees and management keep up-to-date with respect to evolving issues of significance and relevance? |
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(1) The AICPA’s Audit Committee Effectiveness website has numerous resources available for purchase, including its Audit Committee Toolkit for not-for-profit organizations.
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