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Item 8BAGENDA ITEM # 8B MARCH 8, 2010 CITY OF ATLANTIC BEACH CITY COMMISSION MEETING STAFF REPORT AGENDA ITEM: Creation of an Independent Auditor Selection Committee SUBMITTED BY: Nelson Van Liere, Finance Director ~_ DATE: February 26, 2010 BACKGROUND: With the delivery of the September 30, 2009 Annual Audit Report, the current contract with Purvis Gray & Company ended. Pursuant to the current "Audit Procurement Policy", the City must now initiate a Request for Proposal (RFP) to enter into a new contract. The procurement policy dictates that the evaluation of the proposals will be performed by an Auditor Selection Committee created by the City Commission. This Committee has traditionally been made up of a City Commissioner, the City Manager and the Finance Director. This committee is tasked with the evaluation of the RFPs received for auditing services and with making a recommendation to the City Commission. The RFP represents the desire to contract with an audit firm for an initial four year term and then allows for two, one year extensions. This allows the firms to recover the start up costs over the contract term, enabling them the option of proposing a fee structure that is somewhat consistent over the four years. The top three firms, based on established evaluation criteria, will be selected to give presentations to the committee; the committee will then rank the firms and make a recommendation to the City Commission. The City Commission may then approve the recommendation of the Committee or reject the recommendation and proceed with the second or third choice in order. Staff also recommends to deleting the language "No accounting firm or public accountant shall perform the audit for more than six (6) consecutive years" in the audit procurement policy. This language has proven to be a detriment to the selection process. The American Institute of Certified Accountants (AICPA), Government Finance Officers Association (GFOA), and the Government Accounting Office (GOA), all have issued comments on recommended practices that the mandatory rotation of audit firms is not in the best interest of obtaining the best audit. The last time the City of Atlantic Beach issued a RFP, we had very few responses from qualified firms. The current policy explicitly denies the current firm the opportunity to submit a proposal and be evaluated along with the others. Staff agrees with the AICPA, GFOA and the GOA that the exclusion of the current firm may lead to the City denying one of the most qualified and possibly least expensive options from contracting with the City. At the very least, that firm should be considered for, and given an equal opportunity to continue performing audits for the City, considering the excellent work they have done over the last contract period. AGENDA ITEM # 8B MARCH 8, 2010 Excerpts from those organizations mentioned above are attached to this report as well as the proposed deletion of the requirement to rotate. BUDGET: The annual budget for auditing services has ranged from $44,000 to $50,000, depending on special audit requirements in the fiscal year. RECOMMENDATION: l .) To select one City Commissioner to be on an audit selection committee with the City Manager and the Finance Director for the purpose of making a recommendation to the City Commission of an accounting firm to enter into a multi- year contract for annual auditing services. 2.) To amend the Audit Procurement Policy deleting the language prohibiting the same firm from performing services for more than six years. ATTACHMENTS: l .) AICPA, GFOA anal GAO- Excerpts from Recommended Practices on Audit Procurement 2.) Audit Procurement Policy REVIEWED BY CITY MANAGER AGENDA ITEM # 8B MARCH 8, 2010 AUDIT PROCUREMENT POLICY March 2010 The City of Atlantic Beach will periodically undertake a full scale competitive process for the selection of independent auditors, consistent with legal requirements. The competitive auditor selection process will be similar to that which is described in Fl. Statutes sec 11.45. The procedures to be followed will promote competition among qualified firms taking into account their capabilities, adequacy of available personnel, past record, and experience with governmental audits. The City of Atlantic Beach will award amulti-year contract of 4 years with two one year options to extend. The City Commission will be required to approve each extension. The multi-year contract will enable audit firms to spread the initial start up costs over a longer period thus helping to reduce fees and provide continuity of the audit process for both the audit firm and the City. se}}sec~r~t~~ The City will appoint an Audit Selection Committee to make a selection of the top three qualified audit firms using a competitive selection process. The Audit Selection Committee shall adopt procedures for evaluating the various firms; they shall have discussions with those firms, and may require public presentations to the City Commission by no fewer than three firms regarding the qualifications, approach to the audit and the ability to furnish the required services. If fewer than three firms desire to perform the services, the audit selection committee shall recommend to the City Commission such firms as it determines to be qualified. If the City Commission receives more than one proposal for the engagement from the committee, the City Commission may rank, in order of preference, the firms to perform the engagement. The firm ranked first may then negotiate a contract with the City Commission giving, among other things, a basis for its fees for the engagement. If negotiations with the firm ranked first fail, negotiations with that firm shall be terminated and the City Commission shall then undertake negotiations with the second ranked firm. This process shall continue until a contract is negotiated. The City may not conduct negotiations with more than one firm at a time. If the City is unable to negotiate a successful contract with any of the selected firms, the Audit Selection Committee shall select additional firms, and the City Commission shall continue negotiations in accordance with the preceding process until an agreement is reached. AGENDA ITEM # 8B MARCH 8, 2010 Attachment 2 Excerpts: Mandatory audit firm rotation has been a concern for many years. Some entities that support mandatory audit firm rotation believe that the "fresh look" will provide further assurance that their financial statements are not materially misstated due to errors or fraud overlooked by the incumbent auditors. Auditor independence has also been noted as a concern of some entities. Those who have independence concerns feel that the auditor's comfort level with management developed over time can alter the auditor's actions to appropriately deal with financial reporting issues that materially affect the entity's financial statements. Since the enactment of the Sarbanes-Oxley Act of 2002, many independent and required studies of the effects and benefits of mandatory audit firm rotation have been performed. Government agencies, authoritative associations, and state officer task forces such as the General Accounting Office (GAO), American Institute of Certified Public Accountants (AICPA), Government Finance Officers Association (GFOA), Florida Auditor Selection Task Force, etc., have conducted studies and issued reports addressing mandatory auditor rotation. Each of these reports has concluded that audit firm rotation may prove to be counterproductive from the lack of qualifications and experience of successor firms to perform certain audits. Other conclusions include the belief that the costs of mandatory audit firm rotation are most likely to exceed the benefits. Below are excerpts from extensive reports on studies performed. Government Accounting Office (GAOJ, "Public Accounting Firms -Required Study on the Potential Effects of Mandatory Audit Firm Rotation" Report to the Senate Committee on Bankina Housina and Urban Affairs and the Housina Committee on Financial Services - "GAO believes that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and the loss of institutional knowledge of the public company's previous auditor of record, as well as the current reforms being implemented. ...auditor's knowledge and experience with auditing a public company after a change in auditors is a concern... that a number of factors affect the auditor's ability to detect financial reporting issues that may indicate material misstatements in a public company's financial statements, including education, training, and experience; knowledge of GAAP and GAAS; experience with the company's industry; appropriate audit team staffing; effective risk assessment process for determining client acceptance; and knowledge of the client's operations, systems, and financial reporting practices. Although each of the above factors affects the quality of an audit, opponents of mandatory audit firm rotation focus on the increased risk of audit failure that may result from the new auditor's lack of specific knowledge of the client's operations, systems, and financial reporting practices." American Institute of Certified Public Accountants (A/CPAJ, "Auditor Rotation" - "In the small company environment the public is best served by not imposing regulations, such as mandatory auditor rotation that have the potential to limit choices, decrease competition. and thereby drive up costs." Government Finance Officers Association (GFDAJ, "Audit Procurement (1996 and 2002" GFOA Recommended Practice - "...the frequent lack of competition among audit firms fully qualified to perform public-sector audits could make a policy of mandatory auditor rotation counterproductive. The audit procurement process should be structured so that the principal factor in the selection of an independent auditor is the auditor's ability to perform a quality audit."