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HomeMy WebLinkAbout2008/08/12 Item 3 CITY COUNCIL AGENDA STATEMENT ~f:.. CITY OF - CHULA VISTA AUGUST 12,2008, lteml ITEM TITLE: MODlFICATION OF AUDlT SUBCOMMITTEE SUBMITTED BY: DlRECTOR OF FINANCE/TREASURER ~ REVIEWED BY: CITY MANAGER 4/STHS VOTE: YES D NO 0 SUMMARY The Auditing Standards Board recently published a new standard associated with auditor communications. Statement on Auditing Standards No.114 established a requirement for the auditor of financial statements to communicate certain significant matters related to the audit to those charged with governance. ' At a City Council workshop held on May 1,2008, the City's auditors, Macias, Gini and O'Connell LLP presented the Statement on Auditing Standards 114 requiring the establishment of an audit committee for the City. During the workshop, the Mayor and Councilmember Ramirez were appointed to the audit subcommittee for the duration of the City's Fiscal Year 2007/2008 financial statement audit. ENVIRONMENTAL REVIEW Not applicable. RECOMMENDATION Council expand the audit subcommittee to include all five City Councilmembers. BOARDS/COMMISSION RECOMMENDATION Not applicable. DISCUSSION In the wake of emerging developments in corporate governance and in light of increasing expectations by those who rely on audited tinancial statements the Auditing Standards Board recently published new standards associated with auditor communications. Among other things, Statement on Auditing Standards No.114 establishes a requirement for the 3-1 AUGUST 12,2008, Item_ Page 2 01'4 auditor of financial statements to communicate certain significant matters related to the audit to those charged with governance. The matters include items that have been addressed in prior standards, as well as certain new requirements. The Statement also provides additional guidance on the communication process including, for example (this list is not all inclusive): . the importance of effective two-way communication . situations where management is involved with governance . the adequacy of communications between the auditor and those charged with governance The purpose of the staiI report is to outline of the new requirements and how they affect those charged with governance. It is important for each member of an organization's governing body to recognize his/her responsibilities as well as the responsibilities of the independent auditor. Definitions The new standard clearly draws a distinction between those charged with governance and the management of the organization. The following definitions are outlined in the new standard: . Those charged with governance means the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. For entities with a board of directors (i.e. City Council), this term includes the audit committee or similar subgroup. . Management means the person(s) responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Communication principles With regard to conununication, the new standard points to tlu.ee principle purposes. It indicates that the auditor: I. Communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the scope and timing of the audit. 2. Obtain from those charged with governance information relevant to the audit. 3. Provide those charged with governance with timely observations. Importance of two-way communications While the standard is primarily focused on communication from the auditor to those charged with governance, it also indicates the importance of effective two-way communications. The new standard indicates that two-way communication assists those charged with governance in understanding matters related to the audit, important transactions, sources of supportive documentation, and in satisfYing their obligation to 3-2 AUGUST 12,2008, Item--3 Page 3 of 4 oversee the financial reporting activities. The standard goes on to point out that poor two- way communication might be an indication of the lack of an adequate control environment, which might influence the auditor's assessment of risk, and consequently the scope of the audit procedures. According to the new standard, the auditor must assess the effectiveness of such communications and whether it adequately fulfills the auditor's responsibilities. Based upon that assessment, the auditor may determine that to fulfill his/her responsibility he/she must communicate directly to the governing body, a right the auditor always maintains. To assess the effectiveness of communications with those charged with governance the standard indicates that the auditor may look to numerous indicators. For example the auditor may: . Evaluate the appropriateness and timeliness of action taken by those charged with governance in response to matters communicated by the auditor. . Consider the openness of those charged with governance in their communications with the auditor. . Assess the apparent ability of those charged with governance to meet without the presence of management. . With regard to situations in smaller organizations where management may also be involved with governance, evaluate the awareness of how matters discussed with the auditor affect their broader governance, responsibilities, along with their responsibilities as managers. The standard points out that good governance implies that the auditor should have access to the audit conunittee or its subgroup, that the auditor actually meet with the committee periodically, and the committee may meet with the auditor without the presence of management at least annually. If, in the judgment of the auditor, the two-way communication is not adequate, the standard indicates that the auditor may have to ultimately withdraw from the engagement. The position makes it clear that the Auditing Standards Board views two-way communication as a very component of the audit. At a City Council workshop held on May 1,2008, the City's auditors, Macias, Gini and O'Connell LLP presented the Statement on Auditing Standards 114 requiring the establishment of an audit committee for the City. During the workshop, the Mayor and Councilmember Ramirez were appointed to the audit subcommittee for the duration of the City's Fiscal Year 2007/2008 financial statement audit. Subsequently, the City's auditors met with the audit subcommittee members, City Manager and members of the Finance Department on May 5, 2008 as part of the arumal financial audit planning process. 3-3 AUGUST 12, 2008, 1tem~ Page 4 of 4 . DECISION MAKER CONFLICT Staff has reviewed the decision contemplated by this action and has determined that it is not site specific and consequently the 500 foot rule found in California Code of Regulations section I 8704.2(a)(l) is not applicable to this decision. FISCAL IMP ACT There is no impact to the General Fund by this action. A TT ACHMENTS None Prepared by: Phillip DClVis. Assistant Director of Finance 3-4