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From The AICPA Audit Committee Toolkit.
Copyright © 2004 by the American Institute of Certified Public Accountants,
Inc., New York, New York.
| Purpose of This Tool. While there is no explicit requirement for a government audit committee to include a member having some level of financial expertise, it is considered a good practice. In addition, it should be the goal of the government audit committee that all its members have some level of experience in financial matters. The following information illustrates how the audit committee might approach assuring it has access to requisite financial expertise. |
Audit Committee Financial Expertise
The following attributes are all deemed to be typical components of financial
expertise:
- An understanding of generally accepted accounting principles (GAAP),
including those relevant standards for state and local government accounting
and financial reporting issued by the Government Accounting Standards Board
(GASB); an understanding of financial statements, generally accepted auditing
standards (GAAS), and generally accepted government auditing standards (GAGAS,
also known as Yellow Book). Depending on the circumstances at the government
organization in question, knowledge of the Single Audit Act of 1984, as amended,
and the U.S. Office of Management and Budget Circular A-133 might also be appropriate.
- The ability to assess the general application of the foregoing principles
and standards in connection with the accounting for estimates, accruals, and
reserves.
- Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that can reasonably be expected to be raised by the organization’s financial
operations, or experience actively supervising (that is, direct involvement
with) one or more persons engaged in such activities.
- An understanding of internal controls and procedures for financial
reporting.
- An understanding of audit committee functions.
- A general understanding of the government environment and specific
knowledge of the government sector operations (for example, local government,
municipal services and finance, labor relations, public health, education,
transit, etc.) in which the organization participates.
The following questions
should be used to assess whether an individual audit committee member, or
the committee as a whole, possesses the above attributes.
- Have one or more individuals completed a training program in accounting
or auditing?
- Do one or more individuals have experience as a chief or principal
financial officer (for example, finance director or business manager), principal
accounting officer, controller, public accountant, or auditor?
- Do one or more individuals have experience in position(s) that involve
the performance of similar functions?
- Have one or more individuals gained experience by actively supervising
a person(s) performing one or more of these functions?
- Do one or more individuals have experience overseeing or assessing
the performance of other government organizations, companies, not-for-profit
organizations, public accountants, or government auditors with respect to the
preparation, auditing, or evaluation of financial statements?
- Do one or more individuals have other relevant financial experience
in the government sector (for example, service on other government boards or
experience as a banker or investment adviser)?
- Do one or more individuals have experience serving on audit committees
of other government organizations?
Alternative Approaches to Acquiring Financial Expertise on the Committee
If no individual member of the audit committee possesses the attributes required
for financial expertise, and the committee members collectively do not possess
such attributes, several options might be considered:
- Establish a relationship with a peer or otherwise comparable government
organization to have the chief financial officer for one organization provide
financial expertise to the other. Such arrangements can be reciprocal or involve
multiple organizations. (While this could be a solution, the appearance of
interlocking boards might be seen as an impairment of independence and/or objectivity.)
- Engage a financial professional to provide financial expertise as
a paid consultant to the audit committee. Such an individual must be otherwise
independent with respect to the government organization (that is, must have
no other financial arrangements with the organization).
- Establish a training program for audit committee members to develop
the necessary financial expertise. Such training can include professional development
programs offered by the AICPA, associations serving the government industry,
or the specific sector in which the government organization participates, or
in-house training programs led by members of the organization’s financial
management team.
Resources
Various organizations provide information to support audit committees in carrying
out their responsibilities. In addition to this toolkit, the AICPA maintains
the Audit Committee Effectiveness Center (www.aicpa.org/audcommctr/homepage.htm).
Independent Sector has devoted significant attention to issues related to financial
expertise, as have sector organizations such as the National Association of
College and University Business Officers. Many public accounting firms provide
information on these subjects as well. Finally, although its provisions are
not directly applicable to government organizations, the “SEC Rule on
Audit Committee Financial Experts” contains information that may be of
interest. See the Resource section of this toolkit for additional sources of
information.
From The
AICPA Audit Committee Toolkit. Copyright ©
2004 by the American Institute of Certified Public Accountants, Inc., New
York, New York.
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