Section: AUXILIARY ORGANIZATIONS
|Section 13000 Policies|
Policy Number: 13175.00
Policy Title: Auxiliary Organization External Auditor Firms Qualifications
Policy Effective Date: July 19, 2013
Last Revision Date: July 19, 2013
(see revision history)
The fair presentation of financial statements in accordance with generally accepted accounting principles is the responsibility of the auxiliary organizationsí managements. In hiring external audit firms, it is the policy of the CSU to enlist firms that possess industry-specific proficiencies in order to best evaluate managementís assertions in each of the financial statements.
As described in Education Code Section 89900 and California Code of Regulations Title 5 Section 42408, the responsibility for facilitating external audits rests with both the California State University, and each auxiliary organization governing board. This dual responsibility accentuates the obligation for both parties to ensure that audits are performed professionally and by qualified accounting firms.
The CSU auxiliary organizations possess a unique complexity that incorporates:
- ongoing Chancellor’s Office guidance over related-party transactions with 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.
Given the unique complexities of the CSU auxiliary organizations, it is necessary that the auxiliary organizations’ external auditors possess the following minimum proficiencies and experience:
- Demonstrated experience in auditing 501(c)3 Not-for-Profit Organizations;
- Demonstrated proficiency in both the FASB and GASB accounting and reporting requirements related to both Not-for-Profit Organizations and Public Universities;
- Demonstrated experience and proficiency in performing OMB Circular A-133 Audits (“Single Audits”), including federal and state grants and contracts, if applicable to the auxiliary organization;
- Possess the qualifications and training to perform the auxiliary organization audits in accordance with Government Auditing Standards, issued by the Comptroller General of the United States; and
- Demonstrated track record of providing quality financial statement audits for not-for-profit organizations.
To evaluate potential external auditors qualifications for performing the audits, auxiliary organizations’ managements must minimally gather the information outlined in guidelines set forth in this policy.
By the due date each year, the campus Chief Financial Officer will submit to the Chancellor’s Office the written evaluation questionnaire for the external audit firm selected by the auxiliary organizations.
Benjamin F. Quillian
Executive Vice-Chancellor/Chief Financial Officer
Approved: July 19, 2013
APPLICABILITY AND AREAS OF RESPONSIBILITY
- November 14, 2011 (Initial issuance)
- February 11, 2013
- February 7, 2014 (Annual Review conducted with no change to policy.)
RESOURCES AND REFERENCE MATERIALS
The following represents the standard systemwide procedures prescribed by the chancellor for performance of the external financial statement audits, specifically as they relate to the qualifications of those performing the audits:
- Government Auditing Standards – The CSU’s financial statements are required to be audited in accordance with Government Auditing Standards (GAS or the “Yellow Book”). The auxiliary organizations’ financial statements are incorporated into the CSU’s systemwide financial statements and, accordingly, will also be required to be performed in accordance with GAS. Auxiliary organizations that currently receive OMB A-133 audits (Single Audits) are already subject to and presumably meet this requirement. This will bring the CSU campuses and all auxiliary organizations in line with the same auditing requirements.
Government Auditing Standards are specific about the minimum level of auditor training for each auditor assigned to the audit (Continuing Professional Education or CPE) and address the required documentation of auditing procedures. The audit firm is required to document how each auditor assigned to the audit meets the minimum GAS Continuing Professional Education requirements prior to contracting with the auxiliary organization.
- Not-for-Profit Audit, FASB and GASB Experience – It is essential that the external audit firm be able to demonstrate experience in auditing 501(c)3 Not-for-Profit Organizations, as each of the auxiliary organizations is a 501(c)3 organization. Accordingly, the external audit firm must have as existing clients a sufficient number of not-for-profit organizations currently being audited in California. In addition, if the auxiliary organization is subject to the requirements of OMB Circular A-133 (due to receipt of Federal funds), the external auditor must have at least five clients in the last three years for which they performed OMB A-133 audits. The not-for-profit client experience should be met by the CPA firm’s office that will perform the audit, not just the CPA firm as a whole, if the CPA firm has multiple offices.
The audit firm must also demonstrate experience in auditing both FASB and GASB organizations, as the auxiliary organizations are also required to report financial statements in a GASB reporting format for inclusion in the CSU Combined Report, by providing best examples of both FASB and GASB clients. If the CPA firm does not currently have GASB clients, then explain the circumstances and provide evidence the firm has sufficient knowledge of GASB requirements and experience to perform a GASB audit as well as a FASB audit. 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.
- Not-for-Profit Accounting Proficiency – The external audit firm is required to submit audited not-for-profit (non-CSU) financial statements recently audited by their firm. The chancellor’s office will perform a technical review of those statements to evaluate the application of accounting principles and auditors’ opinion. For auxiliary organizations reporting under GASB accounting requirements, the (non-CSU) financial statements submitted to the chancellor’s office are required to be GASB financial statements. This requirement is primarily for evaluation of the qualifications of new prospective auditors.
In addition, the Chancellor’ Office 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.
- References – The audit firm is required to provide to the auxiliary organization no fewer than three but preferably five references from current not-for-profit audit clients, including the name of the organization, and contact information for the Chief Financial Officer, Controller, or Director of Finance, total revenues and total assets of the audited organization, and the nature of the services provided by the audit firm to the not-for-profit organization. References are required to be checked by auxiliary organization personnel for each of the not-for-profit organizations provided, assessing the organizations’ perceived satisfaction and technical expertise of the audit firm. Reference responses should be evaluated in light of the entity being audited.
- Training and Education – The chancellor’s office will conduct annual training courses for the external auditors of auxiliary organizations. The purpose of the training will be to discuss the unique events, transactions and reporting requirements of the California State University and its auxiliary organizations. Such training is mandatory for external audit firms and will be tracked by the chancellor’s office. The external audit firm should expect four to eight hours of mandatory training annually.
- Peer Review – The audit firm should demonstrate that it has completed a Peer Review in the most recent three years, receiving an unqualified opinion on the review. The audit firm is required to provide a copy of the Peer Review report for assessment of the results of the examination.
- Chancellor’s Office Review–The campus Chief Financial Officer will submit to the Chancellor’s Office by April 30th of each year the written evaluation questionnaire for the external audit firm selected by the auxiliary organizations using the embedded document. The Chancellor’s Office will review the questionnaire submitted and promptly notify the campus Chief Financial Officer with the results of its review. This review must be conducted annually and prior to entering into an engagement letter with an external audit firm, beginning with the 2011/12 fiscal year audit. If the auxiliary organization has not changed auditor and the audit firm was previously subjected to this review process, an abbreviated form with limited information may be submitted beginning with the 2012-13 fiscal year audit.
Sound Business Practices:
Laws, State Codes, Regulations and Mandates:
- Education Code 89900 WAIS Document Retrieval
- California Code of Regulations Title 5 Section 42408 http://government.westlaw.com/linkedslice/default.asp?Action=TOC&RS=GVT1.0&VR=2.0&SP=CCR-1000
- Executive Order 731 http://www.calstate.edu/EO/EO-731.pdf
COGNIZANT OFFICE(S)CO Manager:
Mr. George Ashkar
Assistant Vice Chancellor, Financial Services
CSU Office of the Chancellor
Mr. Sedong John
Director, Systemwide Financial Standards Reporting
CSU Office of the Chancellor
CABO (Chief Administrators and Business Officers), AOA (Auxiliary Organizations Association), FOA (Financial Officers Association)