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HomeMy WebLinkAboutResolution 2021-06 Establishing an Auditor Selection Committee RESOLUTION NO. 2021- 06 A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF WINTER SPRINGS, FLORIDA, ESTABLISHING AN AUDITOR SELECTION COMMITTEE PURSUANT TO SECTION 218.391, FLORIDA STATUTES; PROVIDING FOR THE AUDITOR SELECTION COMMITTEE'S SCOPE OF DUTIES; PROVIDING FOR AUDITOR SELECTION PROCEDURES; PROVIDING FOR THE REPEAL OF PRIOR INCONSISTENT RESOLUTIONS, SEVERABILITY AND AN EFFECTIVE DATE. WHEREAS, section 218.391(2), Florida Statutes, requires that the City Commission establish an Auditor Selection Committee for the primary purpose of assisting the City Commission in selecting an auditor to conduct the annual financial audit required by section 218.39, Florida Statutes; and WHEREAS, section 218.391(3), Florida Statutes, requires the Auditor Selection Committee to establish factors to use for the evaluation of audit services, to publicly announce requests for proposals, to provide interested firms with requests for proposals, to evaluate proposals provided by qualified firms, and to rank and recommend to the City Commission, in order of preference,no fewer than three(3)firms deemed to be the most highly qualified to perform the required services; and WHEREAS,the City Commission deems that this Resolution is in the best interests of the public health, safety, and welfare of the citizens of Winter Springs. NOW, THEREFORE, BE IT DULY RESOLVED BY THE CITY COMMISSION OF THE CITY OF WINTER SPRINGS, SEIMINOLE COUNTY, FLORIDA, THAT: Section 1. Incorporation of Recitals. The foregoing recitals are deemed true and correct and are hereby fully incorporated herein by reference. Section 2. Committee Established. The City Commission hereby establishes an Auditor Selection Committee ("Committee") which shall consist of three (3) members. Committee members shall include one member of the City Commission and two other qualified persons selected by the City Manager. City employees shall not serve on the Committee. Members of the Committee should possess or obtain basic understanding of governmental financial reporting and auditing. The City Commissioner appointed shall serve as the chair of the Committee. City of Winter Springs Resolution No. 2021- 06 Page 1 of 7 Section 3. Scope of Duties. The Committee shall serve in an advisory capacity to the City Commission in selecting an auditor to conduct the annual financial audit required by section 218.39, Florida Statutes, and shall serve no other purposes. Specifically, the Committee shall establish factors to use for the evaluation of audit services, publicly announce requests for proposals, provide interested firms with requests for proposals, evaluate proposals provided by qualified firms and such other responsibilities expressly provided under Section 218.391, Florida Statutes. The Committee shall rank and recommend to the City Commission, in order of preference, no fewer than three (3) firms deemed to be the most highly qualified to perform the required services. However, if fewer than three firms respond to the request for proposal, the Committee shall recommend such firms as it deems to be the most highly qualified. The Committee shall not have the authority to expend City funds. Committee members shall not receive compensation for their service on the Committee, but may receive reimbursement for expenses incurred in performing their duties, provided such expenses are approved in advance by the City Commission or City Manager. All meetings of the Committee shall be open to the public in accordance with the Sunshine Law. Section 4. Auditor Selection Procedures. The following requirements and procedures shall be followed by the Committee: A. Guidance. The Committee shall be guided by the City Manager and Finance Director and designees who shall serve as the Committee's technical advisors. In addition, to the extent applicable and consistent with this Resolution,the Committee,when performing the responsibilities required hereunder, shall be guided by the Guidance Manual published by the State of Florida Auditor General, a copy of which is attached hereto for reference purposes. B. Requestfor Proposal(`RFP'). The Committee,with the assistance of its technical advisors, shall prepare a Request for Proposal, which shall be guided by the GFOA Handbook including the list of 24 information elements that should be considered in designing an RFP for audit services. (See Page 8 of the Florida Auditor General Manual). At such time the RFP is approved by the Committee, the Committee shall then publicly announce, in a uniform and consistent manner, each occasion when independent auditing services are required to be purchased by the City. The public notice shall be published in a newspaper of general circulation in Seminole County,public procurement sites and such other places approved by the City Manager or his designee to solicit a sufficient number of qualified audit firms. The notice shall include a general description of the audit services required and indicate how interested firms can apply for consideration. The Committee shall provide RFP's to firms that have expressed an interest in providing audit services to the City including providing information on how proposals are to be evaluated and such other information the Committee determines is necessary for the firm to prepare a proposal. City of Winter Springs Resolution No. 2021- 06 Page 2 of 7 C. Factors. The Committee shall establish factors to use for the evaluation of audit services to be provided by a certified public accounting firm duly licensed under Chapter 473, Florida Statutes and qualified to conduct audits in accordance with government auditing standards as adopted by the Florida Board of Accountancy. Such factors shall include, but not be limited to, ability of personnel, experience, ability to furnish the required services, and such other factors as may be determined by the Committee to be applicable to its particular requirements. D. Proposal Evaluation. I. Proposals will initially be reviewed by City staff for compliance with bid proposal requirements. Staff will prepare a checklist to reflect proposal compliance with the elements of the RFP. Staff will submit all proposals and the compliance checklist to the Committee, and will provide information as to which proposals it deems responsive and non-responsive. 2. The Committee shall evaluate proposals submitted by qualified firms. If compensation is one of the factors established by the Committee, compensation shall not be the sole or predominant factor used to evaluate the proposals. When establishing the factors, the Committee is encouraged to consider the following requirements and criteria: a. The audit firm shall not otherwise be currently affiliated with the City. Past services to the City shall not be considered an affiliation. b. The audit firm shall be duly licensed to practice in the State of Florida pursuant to chapter 473, Florida Statutes. C. The audit firm's professional personnel shall be current in all continuing professional education credits for the two (2) years preceding the proposed contract effective date. d. Any other audits being performed by the audit firm shall not create a conflict of interest with respect to the firm's audit of the City. e. The audit firm shall have a history of performing quality audits as demonstrated by recent external quality control reviews. f. The audit firm shall adhere to the instructions in the RFP in preparing and submitting the proposal. City of Winter Springs Resolution No. 2021- 06 Page 3 of 7 g. The audit firm shall demonstrate its past experience and performance with the City, if applicable, and other comparable government engagements. h. The audit firm shall demonstrate the quality and competency of its professional personnel to be assigned to the engagement, and the quality of its management support personnel available for technical consultation. i. The audit firm shall demonstrate its ability to furnish the required services to the City based upon its recent, current and projected workload. j. The audit firm shall demonstrate experience with applicable state and federal grant programs. k. The audit firm shall demonstrate the adequacy of its proposed staffing for various segments of the engagement. 1. The audit firm shall demonstrate the adequacy of its analytical procedures to be used in the engagement. M. The compensation proposed by the audit firm for its audit services. However, if considered, such fees will not be the sole or predominant factor used to evaluate proposals. n. Any other recommendations provided by the Florida Auditor General (See Pages 6 and 7 of the attached Manual). E. Oral Presentations (optional). After evaluation of the written proposals, the Committee at its discretion decide to interview a list of three (3) audit firms which it determines to be the best qualified to perform the requested audit services. Each of those firms shall be invited to make an oral presentation of the firm's qualifications to the Committee. F. Audit Firm Ranking and Recommendation After evaluating the written proposals submitted under the RFP,and conducting any oral presentations required by the Committee under subsection E,the Committee shall rank and recommend in order of preference based on the established evaluation factors no fewer than three firms deemed to be the most highly qualified to perform the required services after considering the factors established pursuant to this Resolution. If fewer than three firms respond to the RFP, the Committee shall recommend such firms as it deems to be the most highly qualified. The Committee City of Winter Springs Resolution No. 2021- 06 Page 4 of 7 shall submit, in writing, its rankings and recommendation to the City Commission. G. Final Selection and Contract Approval. The City Commission shall inquire of qualified firms as to the basis of compensation, if further inquiry is necessary beyond the proposed compensation stated in any submittal, select one of the firms recommended by the Committee, and negotiate through the City Manager a written contract using one of the methods set forth in Section 218.391(4),Florida Statutes. If the City Commission is unable to negotiate a satisfactory contract with any of the recommended firms, the Committee shall recommend additional firms, and negotiations shall continue in accordance with this procedure until an agreement for auditing services is reached. H. The procurement of audit services under this Resolution shall be evidenced by a written contract, as approved by the City Commission, embodying all provisions and conditions of the procurement of such services. An engagement letter, signed and executed by both parties, shall constitute a written contract. At a minimum, the contract shall include the following: a. The services to be provided and the fees or other compensation for such services. b. A requirement that invoices for fees or other compensation be submitted in sufficient detail to demonstrate compliance with the terms of the contract. C. The term of the contract, including renewals, and conditions under which the contract may be terminated or renewed. d. The contract entered into pursuant to this Resolution may be renewed without the use of the auditor selection procedures set forth herein; however, such renewals shall be in writing and approved by the City Commission. Section 5. Severability. If any section, subsection, sentence, clause,phrase,word, or portion of this Resolution is for any reason held invalid or unconstitutional by a court of competent jurisdiction, whether for substantive or procedural reasons, such portion shall be deemed a separate, distinct, and independent provision, and such holding shall not affect the validity of the remaining portions of this Resolution. Section 6. Repeal of Prior Inconsistent Resolutions. All prior resolutions or parts of resolutions in conflict herewith are hereby repealed to the extent of the conflict. Section 7. Effective Date. This Resolution shall become effective immediately upon its adoption by the City Commission of Winter Springs, Florida. City of Winter Springs Resolution No. 2021- 06 Page 5 of 7 [SIGNATURE PAGE FOLLOWS] City of Winter Springs Resolution No. 2021- 06 Page 6 of 7 ADOPTED by the City Commission of the City of Winter Springs, Florida, in a Regular Meeting duly assembled on the/L9""'day of May 2021. , f W _. . KEVIN MCCANN,Mayor ATTEST: CHRISTIAN GOWAN, City Clerk o Approved as to legal form and sufficiency for U the City of Winter Springs,Florida only: ANTHONY A. GARGANESE,City Attorney d E to� City of Winter Springs Resolution No. 2021- 06 Page 7 of 7 SAE O FLORIDA AUDITOR GENERAL AUDITOR SELECTION AND AUDITOR SELECTION COMMITTEE GUIDANCE CE EFFECTIVE FOR AUDITS FOR FISCAL YEARS ENDED SEPTEMBER 30, 20205 AND THEREAFTER SEP"TEI" BI R 202 Table of Contents AuditorSelection Law ..........................................,............................................................. 1 Auditor Selection Committee Composition and Size ............................,.......................... 1 Legal Requirements........................ 1 NonmandatoryGuidance.........................................................................»................. 2 Small Government Considerations..................................................„,........................ 3 Auditor Selection Committee Responsibilities................................................................... 3 LegalRequirements...................................................„...........................,........ —...... 3 Nonmandatory Guidance ..................................................................................,..,.„.. 3 • Establishment of the Auditor Selection Committee ............................„....»„»... 3 • Auditor Selection Committee Responsibilities .............................................„.. 4 • Communications with the Auditor Selection Committee ................................. 6 Small Government Considerations...................„.......»..........................................„..... 6 AuditProposal Evaluation Factors...................................................................,.»............... 6 LegalRequirements.......................................................— ............................. ........ 6 Nonmandatory Guidance .................„......„.......................„.......................................... 6 • Audit Firm Qualifications ..........................................„,.,........................»........ 6 • Technical Qualifications........................................................... 7 Useand Elements of Request for Proposal ..................................................................... 7 LegalRequirements. ..................................................................„......»........».„............ 7 Nonmandatory Guidance .............---.................„..................,................................. 7 • Public Announcement for Audit Services ..........................,............................ 8 • Elements of the Request for Proposal.........»...................„................................. 8 Useand Elements of Audit Services Contract................................................................. 14 Legal Requirements .............................----.......,..,...,......................................„.... 14 Nonmandatory Guidance ..................»......„....„.„......................................................... 14 • Engagement Letter..................................................................„........................, 14 • Required Contract Elements—,....-...........................„,........„.......................... 14 • Additional Contract Elements .........................................„...............,.............. 15 Appendices Appendix A—Auditor Selection Law(Section 218.391, Florida Statutes) .................. 17 Appendix B—Questions and Answers ...................................................................... 19 Appendix C—Auditor Selection and Auditor Selection Committee Resources ............ 24 Auditor Selection Law Section 218.391, Florida Statutes,' the auditor selection law, establishes required procedures for the selection of auditors to perform the financial audits required by Section 218.39, Florida Statutes, for counties, municipalities, special districts, district school boards, charter schools, and charter career technical centers. These procedures help ensure selection of a qualified auditor and satisfactory audit effort. Section 218.391, Florida Statutes, is included as Appendix A to this document. The established auditor selection process requires a request for proposal (RFP) for the solicitation of the necessary audit services, and a selection and negotiation process in which fees cannot be the sole or predominant reason for selecting a particular audit firm. The auditor selection law requires that the governing body of each county, municipality, special district, district school board, charter school, and charter technical career center establish an auditor selection committee. Section 218.391(2)(d), Florida Statutes, provides that while the primary purpose of the auditor selection committee is to assist the governing body in selecting an auditor to conduct the financial audit, the auditor selection committee may serve other audit oversight purposes as determined by the entity's governing body. The purpose of this document, which was initially prepared by an Auditor Selection Task Force established by the Auditor General, is to provide additional nonmandatory guidance regarding the auditor selection committee and the selection of auditors for performing the financial audit required by Section 218.39, Florida Statutes. Specifically, this document provides guidance in the following areas: * Composition of auditor selection committees. M Responsibilities of auditor selection committees. Audit proposal evaluation factors. • Use and elements of an RFP for audit services. Use and elements of audit services contracts. Additional auditor selection topics are included in Appendix B - Questions and Answers. A listing of resources used to prepare this guidance is included in Appendix C. This document includes numerous references to guidance from the Government Finance Officers Association (GFOA) for audit committees because such guidance is relevant to auditor selection committees assigned audit oversight responsibilities. Auditor Selection Committee Composition and Size Legal Requirements Section 218.391, Florida Statutes, provides that the auditor selection committee for a county must, at a minimum, include each of the county officers elected pursuant to the county charter or Article Vill, Section 1(d) of the State Constitution, or their respective designees, and one member of the board of county commissioners or its designee. The auditor selection committee for a municipality, special district, district school board, charter school, or charter technical career center must consist of at least three I All statutory references in this guidance are to the 2019 Florida Statutes. 2 The Task Force included representatives of the Florida Association of Counties, Florida Association of Court Clerks and Controller, Florida Association of Public Purchasing Officers, Florida Association of Special Districts, Florida Government Finance Officers Association, Florida Institute of Certified Public Accountants, Florida League of Cities, and Florida School Finance Officers Association. Also included were representatives of the Auditor General's Office, the Legislative Auditing Committee,and the former Legislative Committee on Intergovernmental Relations. Page 1 members, one of which must be a member of the governing body and who must serve as the committee chair. No employee of the county, municipality, special district, district school board, charter school, or charter technical career center may serve as a member of the auditor selection committee; however, an employee of the county, municipality, special district, district school board, charter school, or charter technical career center may serve in an advisory capacity. Nonmandatory Guidance The effectiveness of an auditor selection committee in performing its assigned duties is dependent on the qualifications and skills of its members and the relationship of the members to the governing body. GFOA Best PracticeS3 recommend the following regarding the composition of audit committees, which would also apply to auditor selection committees: • Ideally, all members of the committee should possess or obtain a basic understanding of governmental financial reporting and auditing. The audit committee also should have access to the services of at least one financial expert, either a committee member or an outside party engaged by the committee for this purpose. Such a financial expert should through both education and experience, and in a manner specifically relevant to the government sector, possess 1) an understanding of generally accepted accounting principles and financial statements; 2) experience in preparing or auditing financial statements of comparable entities, 3) experience in applying such principles in connection with the accounting for estimates, accruals, and reserves, 4) experience with internal controls; and 5) an understanding of audit committee functions. For governmental entities experiencing difficulty in acquiring financial expertise on the audit committee, alternative means of acquiring such expertise include, but are not limited to, obtaining assistance from another governmental entity's chief financial officer, engaging an independent financial professional, or providing a training program for audit committee members to develop the necessary financial knowledge. • To ensure the committee's independence and effectiveness, no governing body member who exercises managerial responsibilities that fall within the scope of the audit should serve as a member of the audit committee. GFOA Best PracticeS4 suggest that the actual audit committee membership be composed of the governing body or a subset of the governing body. Under this approach, it is likely that the entity will need to engage an outside party to obtain the needed experience in governmental financial reporting and auditing. The audit committee members should be provided an orientation on the duties and responsibilities of the committee, including such topics as objectives of internal control, accounting, auditing, and financial reporting to assist in making sound judgments. + An audit committee should have sufficient members for meaningful discussion and deliberation, but not so many as to impede its efficient operation. As a general rule, the minimum membership of the committee should be no fewer than three. Another factor that could affect the size of the audit committee, particularly in smaller communities, is the availability of individuals who possess both the skills desired of an audit committee member and the willingness to make the commitment to perform effectively as a member. It is important that the entity not compromise these factors, as well as independence considerations, in establishing the size of the audit committee. 3 GFOA's Best Practice: Audit Committees(October 2008). 4 GFOA's Best Practice: Audit Committees(October 2008). Page 2 • Members of the audit committee should be educated regarding both the role of the audit committee and their personal responsibility as members, including their duty to exercise an appropriate degree of professional skepticism. GFOA Best Practices5 suggest that audit committee members be provided training regarding the audit committee function. This is particularly critical where the committee members are governing body members who may not possess the needed experience in governmental financial reporting and auditing. At a minimum, such training might include making members familiar with this guidance and the publications referenced herein. Small Government Considerations Smaller entities may experience difficulty in obtaining the necessary experience in governmental financial reporting and auditing from a source that is independent from financial management of the entity. Qualified persons willing to provide such experience may simply not be available within the community. In such instances, the small entity might consider consulting with larger entities in the area to identify employees or consultants of those entities who might be willing to work with their auditor selection committee. A smaller entity may also opt to include members of the auditor selection committee of the larger entity on its auditor selection committee. Regardless of the method used to provide an auditor selection committee function, ultimate responsibility for the selection of the auditor rests with the governing body. Auditor Selection Committee Responsibilities Legal Re iuirement The primary purpose of the auditor selection committee, as contemplated in Section 218.391, Florida Statutes, is to assist in the selection of an auditor to conduct the financial audit required by Section 218.39, Florida Statutes. Section 218.391(3), Florida Statutes, establishes the duties of the auditor selection committee to include: • Establishment of factors to be used for the evaluation of audit services to be provided by an audit firm. • Public announcement of an RFP. o Provision of interested firms with the RFP. • Evaluation of proposals provided by qualified firms. • Ranking and recommendation in order of preference of no fewer than three firms deemed to be the most highly qualified to perform the required services. If fewer than three firms respond to the RFP, the committee shall recommend such firms as it deems to be the most highly qualified. The auditor selection committee may also serve other audit oversight purposes as determined by the entity's governing body. Nonmandata Guidance * Establishment of the Auditor Selection Committee. GFOA Best Practicess advise that the audit committee be formally established by charter, enabling resolution, or other appropriate legal means. Likewise, Florida local governmental entity auditor selection committees should be formally established by charter, ordinance, resolution, or written policies and procedures adopted by the governing body. In addition to addressing the composition of the auditor selection committee (see the previous section, Auditor Selection Committee Composition and Size), the formal means by which the auditor selection committee is established should define the 5 GFOA's Best Practice: Audit Committees(October 2008). 6 GFOA's Best Practice: Audit Committees(October 2008). Page 3 committee's responsibilities and prescribe committee member qualifications consistent with GFOAreoommandmUons. GFO& Best Pnantioem/ recornmmnd that the audit committee be established in such a manner that the auditors engaged to conduct the financial audit report directly to the audit committee. If the auditor selection committee is assigned oversight responsibilities with respect to the independent audit and the establishment of internal controls and adequate management pnoomeoes' the GFCJA'm Best Practice: Audit Committees (October3OO8) should be consulted for additional guidance. � o � GF{]A Best PracUces indicate that all audit committee iaa practical means for a governing body to provide much needed independent review and oversight of the government's financial reporting prooeeaos, internal oontro|s, and independent auditors. GFCABest Practices further indicate that, bx effectively carrying out its functions and responaibi|ibes, an audit committee helps to ensure that management properly develops and adheres to a sound system of internal cmntro|s, that procedures any in place to objectively assess management's practices, and that the independent muditona, through their own ravievv, objectively assess the entity's financial reporting practices, The GF[3A'mpublication, Governmental Accounting, Auditing, and Financial Reporting (2012). also known mm the GFOA Blue Book,o indicates that governing bodies are responsible for ensuring that management fulfills its obligations in regard to internal control and financial reporting. The GFOA Blue Book"also indicates that governing bodies typically establish audit committees for this purpose and audit committee responsibilities, in addition to audit oversight, include selecting the auditors. Accordingly, although State |avv assigns ihiy task to the auditor selection committee, consideration should be given tm using the auditor selection committee asan audit committee as onnh*mnp|a1md by the GFOA. The GFOA Blue Book" further indicates that: o The auditors should report directly bothe audit committee. u The audit oomnnnKiem should have access tothe reports of any internal audibmna, as well as access to any annual internal audit work plans. o The audit committee should publish the results of its work in an annual written report to the governing body. Should the auditor selection committee be assigned audit oversight responsibilities that are in addition to the statutorily mandated auditor selection committee responsibilities (i.e., used as an audit committee as contemplated by the GFQA), consideration should be given to CSFOA guidance regarding audit committee responsibilities. For mxornp|e' the GFQA(m Audit Management Handbook (GF{]/\ Handbook) recommends that, in addition to auditor se|ect|on, the audit committee perform the following functions: o Monitoring the Audit �x � The ��F��/\Handbook indicates that concerns of interest to the audit committee during the audit would include whether the audit is progressing on schedule and whether potential problems are identified and immediately cnrreoted, if appropriate. Potential problems might include difficulties in gathering information or contacting key pmraonne|, discovery of instances or indications of fraud, 'GFO/(s Best Practice:Audit Committees(October 2OV8). »GFCA'o Best Practice:Audit Committee (October2O08). »GFOA Blue Book,Chapter 44. page 761. ,»GFO«Blue Book, Chapter 44.pages 7O1 and 782. ^, GFOA Blue Book,Chapter 44. pages 7D2 through 7M4. 'x GFOAHandbook. ChopterV.pages 87 and O8. Page waste, or abuse that require immediate attention, and circumstances that could result in a modified opinion. Monitoring can be accomplished through periodic progress reports or meetings. Review of Final Audit Reports. The GFOA Handbook13 recommends that the audit committee review each of the auditor's reports to gain a thorough understanding of problems identified by the auditor to provide the background needed to address resolution of the problems. In view of the emphasis placed on management letters in Florida law and the Rules of the Auditor General,14 an auditor selection committee assigned audit oversight responsibilities should review the management letters required to be submitted as a part of the audit report. For the committee to effectively review the results of the audit, the results must be communicated in a manner that assures a thorough understanding by the committee members. In lieu of relying solely on the delivery of a written audit report, this might be accomplished at a public meeting15 in which committee members have an opportunity to ask questions of the auditors. This could be done either in addition to, or in conjunction with, a public meeting of the entity's governing body at which governing body members would also have an opportunity to question the auditors. If the findings are presented at a governing body meeting, consideration should be given to a meeting convened solely or predominantly for this purpose to assure that the findings are adequately communicated. o Audit Resolution The GFOA Handbook16 points out that while it is management's responsibility to implement corrective—action—related—to—audit—findings,—the audit committee should be responsible for monitoring management's implementation. The GFOA Handbook suggests that governing bodies may want to require management to answer to the governing body for any failure to implement corrective action plans in a timely manner to the satisfaction of the audit committee. Specified entities are required by Auditor General Rule 10.558(1) to provide the Auditor General with responses to all audit findings included in their financial audit reports. The responses are required to include corrective action designed to prevent recurrence of any findings included in the audit report. o Auditor Evaluation The GFOA Handbook17 views auditor evaluation as the first step of the subsequent year's audit procurement or, if audit procurement is not scheduled for the subsequent year, a process for identifying and recommending needed improvements in the auditor's performance. The GFOA Handbook recommends that the audit committee meet with management to discuss matters pertaining to the auditor's performance including: ability to meet deadlines; compliance with other provisions of the audit contract; competence and cooperativeness of the audit staff; and thoroughness and reasonableness of audit adjustments, findings, and recommendations. In assessing the overall effectiveness of the audit, the auditor selection committee may determine a need for audit procedures that are in addition to the minimum procedures 13 GFOA Handbook,Chapter 6,pages 88 through 91. 14 All references in this guidance to Rules of the Auditor General rules are to Chapter 10.500, Rules of the Auditor General effective for fiscal years ending September 30,2019, and thereafter. 15 Auditor selection committee meetings are subject to the Sunshine Law(Section 286.011, Florida Statutes)as discussed in question 11 of Appendix B-Questions and Answers. 16 GFOA Handbook, Chapter 6,page 92. 17 GFOA Handbook,Chapter 6,page 92. Page 5 necessary to issue on opinion on financial statements. Such information would be useful in preparing future requests for proposals. � Communications with the Auditor Selection Committee. If the auditor selection committee is assigned audit oversight responsibilities (i.e.' is acting as an audit connnlittee), effective communication between the auditors and the auditor selection committee imnecessary. Financial aUditnoonductmdpurouonttoSaotion218.38. F|ohdaStadutas. muotbenmnductedinmoromdanoa with auditing standards generally accepted in the United States" and government auditing s1andands.19 Auditing standards generally accepted in the United States require that amd|hmna nomnrnuniCRte cartain maifters with the audit committee or other subgroup of those charged with Qovernanoe:» and communicate with the audit committee regarding internal control-related maftermuI and identified or suspected noncompliance with laws and regulations.22 Small Ggyerrimprit Considerations VVMi|m smaller enUbmo may lack the resources to expand the use of the auditor selection committee to accommodate all or many of the nonmmandotory audit oversight functions described ebove, all entit|ea, regardless of size, are required to use the committee for auditor selection. The entities are encouraged touse the auditor selection committees for the other functions to the extent available in their particular circumstances. Additional discussion regarding the establishment of auditor selection committees by small governments is included in the Auditor Selection Committee Composition and Size section. Audit Proposal Evaluation Factors Legal Reguirements; Section 218.391/3\(a), Florida StatuUao, requires that the auditor selection committee establish factors to be used for the evaluation of audit services to be provided and that such factors inc|ude, but not be limited bJ. ability of personnel, experience, ability tofurnish the requested services, and such other factors as rnay he determined by the committee to be applicable to the particular requirements. Section 218.391(3)(d). Florida Statutes, prohibits the use of compensation ao the sole orpredominant factor for evaluating proposals. Nonmandatory Guidance ConsistentConsistentwith|th Florida law, GF0A Best Pmactioeoaostete "The audit procurement pnmoegm 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. Price should not be allowed to serve as the sole criterion for selection of an independent auditor." � Audit Firm gualifications. VVhi|g Florida |axv pnaechbme minimal audit firm qualifications that must be considered in selecting onauditor, the GFO4 /fmndhook2wdescribes an evaluation process tobe used inselecting the auditor that includes certain mandatory criteria that must bm met bxthe auditor to qualify for further consideration. The criteria listed bw the GFOAHandbook include: These standards are promulgated by the AICPA in its publication A/CFA Professional Standards. All references in this guidance buAKlFA Professional Standards are»o such standards ondifiodeouf July 1.2O19. ,oThooeotandordeampmmu|gatadbyUhoComu¢m||e,Gonenm| ofthoUnibadS\o0aoindhepub|icoxionGovmmmentAuditivg Standards. u»Ak:FA Professional Standards,AU-C Sections 2OD.D8`14. a`A/{PM Professional Standards,AU-C Sections 385.11 `15. 2zA/CPAProfessional Standards,AU'C Sections 25O.21 `23. 23 GFOA'm oont Practice:Audit Procurement(March 2008). =GFOA Handbook,Chapter 5.page 79. Page 6 o Meets applicable independence requirements. o License to practice as a CPA in the State. o Receipt of adequate continuing professional education by key personnel. o Completion of a quality control review within the past 3 years. o A history of performing quality audits. Technical_ Qualifications. The GFOA Handbook25 indicates that if a point system is used to evaluate proposals, the total points should be divided between two categories for technical qualifications of proposers: (1) expertise and experience and (2)audit approach. Expertise and experience qualifications could include, for example: o Past experience and performance on comparable government engagements. o Quality of the firm's professional personnel to be assigned to the engagement and quality of the firm's management support personnel to be available for technical consultation. o Experience with specific State and Federal grant programs. o Information technology expertise. Audit approach qualifications include, for example: o Adequacy of proposed staffing plan (hours and level) for the various segments of the engagement. o Adequacy-of-sampling-techniques: o Adequacy of analytical procedures. The GFOA Handbook26 points out that technical qualifications should be tailored to meet each government's unique environment and specific audit requirements and cites as an example a government that sponsors its own pension plan for employees, which might require actuarial expertise. The GFOA Handbook also recommends assignment of point value ranges to each criterion to aid in the evaluation of the technical qualifications of proposers, which allows the entity to reflect the relative importance of the qualifications for that government and engagement (i.e., allows the entity the flexibility to reflect qualitative differences in the qualifications presented in the proposals). Use and Elements of Re guest for Proposal Legal Re uirements Pursuant to Section 218.391(3)(c), Florida Statutes, the auditor selection committee must provide interested audit firms with an RFP. The RFP is required to include information on how proposals are to be evaluated and such other information as the committee determines is necessary for the firm to prepare a proposal. Nonmandatory Guidance The GFOA Blue Book27 states that an effective RFP serves two purposes: 1) provides enough information about the entity to allow potential auditors to assess whether their particular experience and resources would be a"good match"for the engagement, and 2)elicit enough information from responding audit firms to assess their ability to perform a high quality government audit. 25 GFOA Handbook, Chapter 5,page 80 and 81. 25 GFOA Handbook, Chapter 5,page 81. 27 GFOA Blue Book, Chapter 44,page 771. Page 7 • Public Announcement for Audit Services. Section 218.391(3), Florida Statutes, provides that the auditor selection committee shall publicly announce an RFP and provide interested firms with the RFP. To achieve the benefits of a competitive selection process, it is critical that there be sufficient responses by qualified audit firms to the RFP. The GFOA Handbook 28 states that a well-planned solicitation effort is needed to identify a sufficient number of qualified audit firms. This can be accomplished in a variety of ways and the law does not mandate any specific method. The method selected should provide sufficient time for the potential responders to prepare an appropriate response. The NIGP: Institute for Public Procurement,19 in its publication Public Procurement Guide for Elected and Senior Government Officials,30 indicates that potential service providers should be given a minimum of'14 to 30 days to prepare bids or proposals. To promote competition, the method of noticing the RFP should be designed to reach as many potential providers of audit services as possible. The GFOA Handbook" identifies several methods for identifying and of reaching qualified audit firms from which proposals can be solicited, including advertisement in local newspapers, notice in a publication of the state society of certified public accountants, inquiries of other entities in the same region, and direct mailing to audit firms. In Florida, the Auditor General maintains a database of local government audit reports received, including the names of the audit firms that conducted the audits, thereby providing another source that entities may find useful for identifying and reaching potential audit firms. If the entity opts to advertise in a newspaper, the newspaper selected should have adequate coverage to assure an opportunity for a sufficient number of responses. • Elements of the Re guest for Pro oral. The GFOA Handbook 32 includes a list of 24 information elements that should be considered in designing an RFP for audit services. These elements generally either provide information to the prospective proposers regarding the RFP evaluation process or assure that adequate information is provided by the proposers to allow for an informed decision by the entity. It may not be necessary to include all of these elements in the RFP, but each element should be considered, and those elements considered to be appropriate for the given circumstances should be incorporated. The elements listed in the GFOA Handbook consist of: 1. How proposals will be evaluated. The RFP should clearly state the factors upon which the selection will be based and could provide: a. The relative weights of the evaluation factors, particularly with respect to qualifications and price, when price is considered as one of the evaluation factors. b. A statement that price will not be the sole or predominant factor to assure that highly qualified firms will receive appropriate consideration and to discourage the submission of proposals with unrealistically low prices by less qualified firms. c. Auditor qualifications that are mandatory for all proposers. d. Particular qualifications that will be considered more favorably (e.g., experience with particular grant programs). 28 GFOA Handbook, Chapter 4,page 27. 29 NIGP: Institute for Public Procurement is a membership-based, nonprofit organization composed of members representing Federal, state, provincial and local government levels throughout the United States and Canada and provides support to professionals in the public sector procurement profession. 30 NGIP Public Procurement Guide for Elected and Senior Government Officials(2016),page 17. 31 GFOA Handbook, Chapter 4,pages 27 and 28. 32 GFOA Handbook,Chapter 4,pages 29 through 45. Page 8 2. Procedures to be followed in the proposal process. The prospective proposers who will be incurring the cost of preparing and presenting a proposal will need specific information as to how to respond to the RFP. Such information might include: a. The appropriate format to use in making the proposal. b. Identification of a contact person. c. Whether there will be a pre-proposal conference. d. Information regarding the submission of proposed prices (i.e., audit fees), such as the form or timing of submission of the proposed audit fee or the level of detail required to support the proposed audit fee (e.g., number of hours x level of staff at set rate per hour).33 e. Other aspects of the proposal process, including submission deadlines, consideration of late proposals, and notification of evaluation and auditor selection results. 3. Brief description of the entity and its accounting systems and financial reporting structures. Prospective proposers require information that will provide a basis for determining the type and amount of resources that will be needed to perform the audit. This information might include: a. General description of the entity, including: 1. The entity's fiscal year. ii. Services the entity provides its citizens. Ill. Organizational chart and key personnel. iv. Size of the entity (e.g., geographic area, number of employees, total budget or payroll). v. The entity's documented policies and procedures. b. Fund structure and basis of accounting. c. Involvement in Federal awards programs and State financial assistance projects. d. Description of pension plans. e. Information regarding component units and joint ventures. f. Magnitude of financial operations. g. Scope of information systems, including networking, software vendors, and major applications. h. Existence, size, and scope of the internal audit function. L Contact person for access to prior audit information. 4. Known weaknesses in the entity's internal control structure. Prospective proposers will want to be made aware of significant known internal control deficiencies. This could be accomplished by providing the proposers with a copy of the prior year external audit report(including financial statements, auditor's reports, and management letters), prior year adjusting entries, and the status of prior audit report findings(corrected or uncorrected). It may also be useful to provide proposers recent relevant internal audit reports. 33 Section 218.391, Florida Statutes, permits consideration of compensation in selecting the auditor; however, Section 218.391(3)(d), Florida Statutes, prohibits the use of compensation as the sole or predominant factor for evaluating proposals. Additionally,Section 218.391(5),Florida Statutes,provides that the method used by the entity to select,and negotiate a contract with, an auditor must ensure that the agreed-upon compensation is reasonable to satisfy the requirements of Section 218.39, Florida Statutes,and the entity's needs. Page 9 5. Anticipated implementation problems arising from new authoritative pronouncements. An entity's readiness to implement new pronouncements, laws, or regulations having a significant impact on the entity's financial operations and reporting could impact the auditor's consideration of the resources needed to perform the audit. 6. Principal contacts inside and outside the entity. Examples of contacts that proposers might want to be aware of as individuals with whom they will be expected to interact during the engagement include: a. Chief executive officer. b. Chief financial officer. c. Auditor selection or audit committee members. d. Director of internal audit. e. Grants management personnel. f. Legal counsel. 7. Level of assurance to be required of the auditor for each type of information contained within the report. The auditor will need to be made aware of circumstances that might impact the scope of the audit. Such circumstances might include the audit of the financial statements of a component unit by another audit firm or a determination of compliance with specific legal requirements that will require an auditor's report based on an examination conducted in accordance with AICPA Professional Standards 34 pursuant to Auditor General Rule 10,556(10). 8. Auditing standards required for the engagement Pursuant to Florida 1aW35 and Auditor General Rule 10.551(4), all required financial audits of entities in Florida are to be performed in accordance with Government Auditing Standards promulgated by the Comptroller General of the United States. The RFP might include a statement to this effect to avoid any misunderstanding. 9. The auditor's specific reporting responsibilities. Although the auditor's reporting responsibilities are described in the auditing standards and the Rules of the Auditor General, the GFOA Handbook recommends listing the reporting responsibilities in the RFP. This could be most easily accomplished by reference to the Rules of the Auditor General, Chapter 10.550 (Local Governmental Entity Audits), Chapter 10.800 (Audits of District School Boards), or Chapter 10.850 (Audits of Charter Schools and Similar Entities), as appropriate. For Florida local governmental entity financial audits, the scope of the work to be performed by the auditor could include: a. Expression of opinion in conjunction with a full-scope audit of a comprehensive annual financial report (CAFR) (optional under Florida law and Rules of the Auditor General) or a report on basic financial statements only (minimum requirement for all local government audits). b. Federal or state single audit reports (required if certain thresholds are met). c. Management letter(required for all local government audits). AICPA Professional Standards,AT-C Section 315. 35 Financial audits required by Section 218.39, Florida Statutes, and defined by Section 218.31(17), Florida Statutes, must be conducted in accordance with Government Auditing Standards. Page 10 d. An auditor's report prepared in accordance AICPA Professional Standards36 pursuant to Auditor General Rule 10.556(10). Expected deliverables should also include any requirement for separate opinions for any debt issues or to meet any other reporting requirements. 10. The type and amount of assistance available from the entity. Entities can sometimes reduce the cost of their audits by providing certain assistance to the auditor. To formulate the type and amount of resources to be applied to the audit, the auditor needs information as to the type and extent of assistance that will be available from the entity. The GFOA Handbook refers to various types of assistance including internal audit support, clerical support, and preparation of schedules. A statement might be included acknowledging that the entity is responsible for preparing draft financial statements. Any anticipated concerns regarding the ability of the entity to do so should be disclosed. 11. Required audit timetable and deliverables. The GFOA Handbook recommends that the RFP include the latest acceptable dates for the following: a. Entrance conference. b. Completion of interim audit work. c. Completion of year-end field work. d. Submission of audit adjustments and draft findings. e. Exit conference. f. Issuance of reports. 12. Additional services to be required of the auditor. Auditors often provide additional services beyond audit services; however, the ability of auditors to provide nonaudit services to an audit client has been severely limited by Government Auditing Standards. Careful consideration should be given to the restrictions on such services prior to including them in the RFP. Government Auditing Standards 37 suggest that auditors performing nonaudit services obtain agreement from the entity's management that management will perform the following functions regarding nonaudit services: a. Assume all management responsibilities. b. Oversee the services using an individual with suitable skill, knowledge, or experience. c. Evaluate the adequacy and results of the services. d. Accept responsibility for the results of the services. 13. Information on auditor workspace and access to telephones, copiers, FAX machines, and computers. The GFOA Handbook suggests that the RFP include information on the location and type of workspace that will be made available to the auditor, as well as availability of telephones, Internet access, copy machines, FAX machines, and computer hardware and software. 36 AlCPA Professional Standards,AT-C Section 315. 37 Government Auditing Standards(2018 Revision)paragraph 3.76. Page 11 14. Procedures to be followed to determine if additional audit work is necessary and the fee basis applicable to such work. Circumstances sometimes arise in which the scope of the audit may need to be expanded beyond what was anticipated in the RFP. For example, an entity might request the auditor to perform additional work in an area where the auditor discovered certain control weaknesses. The GFOA Handbook recommends that the RFP indicate that the scope of the audit may only be broadened with the entity's consent and request that proposers indicate how the fee for additional work related to a scope expansion would be determined. 15. Information needed from proposers to evaluate their qualifications. A primary purpose of the RFP is to provide the entity with information needed to assess the professional skill and experience of the auditors who will perform the engagement. The GFOA Handbook recommends that the RFP ask for the following information from the proposer: a. Overall size of the audit firm, b. Location and number of professional staff who will perform the engagement. c. Identification and qualifications of personnel to be assigned to the engagement, including: i. Names and government audit experience of the partner in charge of the audit and other partners who will be assigned review or quality control functions. ii. Names of the manager and other supervisory personnel who will be assigned to the engagement, including information about their government audit experience. iii. Information on certification, licensure, and CPE training of each of the above. iv. Information on membership in professional societies (e.g., AICPA, FICPA, FGFOA, GFOA, AGA) of each of the above. v. Background and qualifications, including experience, of all other professional audit or other staff assigned to the engagement. The GFOA Handbook also recommends that the RFP clearly set forth: (1) the circumstances in which the audit staff may be changed; (2) the need for new staff to meet the same level of qualifications; and (3) the entity's right to reject or approve replacements. 16. Requirement for auditors to furnish a statement that they meet the appropriate criteria for independence. Auditors are required to maintain independence, both in fact and appearance, regarding audit clients. The GFOA Handbook suggests that the RFP require a formal statement from the proposers that they meet the guidelines for independence as set forth in applicable auditing standards. 17. Request for references from other entity clients. The GFOA Handbook suggests that the RFP ask proposers to furnish the names of governments (preferably of similar type and size) for which they have recently performed similar audits, and contact information for those governments. 18. Request for information on the results of peer reviews. Government Auditing Standards38 require that auditors performing audits in accordance with those standards (in Florida, this includes local governmental entity financial audits conducted pursuant to Section 218.39, Florida Statutes) undergo external peer review at least once every 3 years. The GFOA Handbook recommends that the RFP ask proposers to provide the entity with a report on their most recent peer review, and whether it included 38 Government Auditing Standards(2018 Revision)paragraph 5.84. Page 12 a review of the quality of specific government audits. The RFP could also ask for the results of desk or field reviews of their audits by Federal or state agencies, 19. Request for information on the status of any disciplinary actions undertaken against the firm. The GFOA Handbook recommends that the RFP request information on whether any disciplinary action has been taken against the firm at the Federal or state level and, if such action has been undertaken, the current status of the action, In Florida, certified public accountants may be subject to punishment for a misdemeanor committed pursuant to Section 473.322(2), Florida Statutes, or to disciplinary action by the Florida State Board of Accountancy pursuant to Section 473.323(3), Florida Statutes. 20. Request for detailed information on the proposer's anticipated audit approach. The GFOA Handbook points out that, in addition to information regarding the proposer's qualifications, the proposer's audit approach should be evaluated to determine that the proposer has a sound understanding of the scope of the engagement and the entity's environment. Additionally, the entity needs assurance that the proposer will apply the appropriate level of effort needed to perform the engagement satisfactorily. The GFOA Handbook recommends that the RFP ask for the following types of information: a. The extent to which the firm proposes to employ statistical sampling techniques. b. The extent to which the firm proposes to employ analytical procedures. c. The manner in which the firm intends to segment the engagement. —d—The-hours of staff time at each level that will be devoted to each segment. e. The approach proposed for gaining and documenting the auditor's understanding of the entity's internal controls. f. The approach proposed for determining which laws and regulations should be tested for compliance. g. The method of drawing samples for tests of compliance. 21. Requirements applicable to working papers and cooperation with other auditors. The GFOA Handbook recommends that the RFP clearly establish the period for retention of the auditors working papers by the auditor and parties who are allowed access to the working papers. In establishing the retention period, the entity should consider that AICPA Professional StandardS39 require financial statement auditors to retain"audit documentation of any nature" (this would include audit working papers)for at least 5 years after release of the audit report. This should be considered a minimum retention period in drafting an audit services contract. The GFOA Handbook also recommends that the RFP include provisions requiring accessibility to the working papers by Federal cognizant agencies; principal auditors, where component units are audited by other auditors; parties designated by the entity as part of an audit quality control review; and successor auditors for matters relating to continuing accounting significance. 22. Policy toward joint proposals or the use of subcontracting. The use of subcontracting or joint ventures on the part of auditors can be a means for encouraging participation by smaller firms. The GFOA Handbook recommends that any subcontracting after the audit contract is awarded be subject to the entity's right to approve or reject subcontracting firms. Further, if joint proposals or subcontracting is allowed, the RFP should request proposers to identify the firm that will serve as the principal auditor, 39 AlCPA Professional Standards,AU-C Section 230.17, Page 13 23. Right to reject proposals, demand additional information, and use unsuccessful The GFOA Handbook recommends that the RFP indicate that the entity: o. Retains the right to reject any orall proposals, b. Retains the right to request additional information from proposers and failure bo provide the information could result in rejectionofaproposal. c. Reserves the right to retain proposals and use ideas from them. d. Is nut obligated in any manner to reimburse 0mme for ousts incurred in connection with responding*J the RFP. 24. Any additional language bo meet the requirements mf applicablelaws and regulations. The GFOA Handbook suggests that the entity be ovxure of and include any specific language required by law orregulation. Use and Elements of Audit Services Contract Legal Requirements Section 218.391(7). Florida Statutes, requires that every procurement of audit services be evidenced bya written contract embodying all provisions and conditions of the procurement of such services. An engagement letter signed and executed by both parties constitutes a written contract. The written contract shall include, eda minimum, the following: • & 9rovioion specifying the services to be provided and fees or other compensation for such services. • A provision requiring that invoices for fees and other compensation be submitted in sufficient detail bo demonstrate compliance with the terms uf the contract. • & provision specifying the contract period. including renevva|s, and conditions under which the contract may be terminated or renewed. Section 210.391/8\' Florida StatVtes, provides that written contracts may be renewed (pursuant to renewal periods specified in the contract)without the use of auditor selection procedures and that such renewals shall be in writing. Nonmandatory Guidance The audit services contract is a legally binding agreement that should be prepared and reviewed with the advice of legal counsel. The GFOA Handbookl» suggests that the written agreement incorporate by reference the terms of the RFP and specific language regarding the understanding between the entity and the auditors. The entity should also be careful to ensure that the written agreement terms are consistent with the terms of the successful proposal. • Enaaaement Letter. While Section 218.381(7)' Florida 8tatUtes, authorizes the use of an engagement letter as an audit services oontrmot, if it is signed by both part|es, the use of on engagement letter does not relieve the need to include all provisions that would constitute a good contract and protect both the entity and the auditor. • Reguired Contract Elements. Am indicated above, there are certain legally required elements that must he included in the audit services contract. Additional guidance for each of these elements follows: o Services to be provided and fees or other compensation (Section 318.391(7)&d, Florida 8bnb/8aa0. ^4/CPA Professional Standards" indicate that agreed upon tmrnno of the audit engagement should indudw, among other things, the objective and scope of the audit, the nmopong|bi|iUmm of the auditor, and the responsibilities of entity management. ^4/CPA *»GFOA Handbook, ChopterO.page 85. 4`A/CPA Professional Standards,AO-C Section u1o.1O. Pmge14 Professional Standards42 also suggest elaborating on the scope of the audit, to include reference to applicable legislation, regulations, generally accepted auditing standards, and ethical and other pronouncements of professional bodies to which the auditor adheres. Florida law and the Rules of the Auditor General include several requirements that impact the scope of the audit in addition to the required auditor's reports on the financial statements and State and Federal programs. Specifically addressing these requirements in the contract helps to preclude any subsequent misunderstandings regarding the auditor's responsibilities. o Invoices for fees and other compensation in sufficient detail to demonstrate compliance with the contract (Section 218.391(7)(b), Florida Statutes). AICPA Professional Standards43 suggest that the basis on which fees are computed and any billing arrangements be included in the engagement letter (contract). The basis for payment may vary from a lump sum arrangement to specific rates to be paid for the services of specific employees or categories of employees of the audit firm and reimbursement for specific costs, such as travel, incurred in connection with the engagement. The level of detail on the invoice sufficient to demonstrate compliance with the terms of the contract will vary according to the basis for payment. In the case of a fixed fee contract, the basis for payment should be clearly defined within the audit services contract. If the contract identifies certain employees for which the firm will be paid at specified hourly rates, the contract should require invoices that indicate the numbers of hours worked by each employee and application of the appropriate rates. If the contract provides for reimbursement for certain actual costs, the contract should require invoices that demonstrate the costs actually incurred by the firm in the form of receipts or similar documentation. o Contract period, renewals, and termination (Section 218.391(7)(c), Florida Statutes). The contract must specify the number of years for which it will be in effect, including any options for renewal on the part of the entity. The law does not prescribe a maximum term for an audit services contract or a maximum number of renewal periods. Once the contract period, including renewals, has expired, any further required audit services must be subjected to the auditor selection law as required by Section 218.391, Florida Statutes. The GFOA's Best Practice: Audit Procurement (March 2019) recommends that governmental entities enter into multiyear agreements of at least 5 years in duration when obtaining the services of an independent auditor. The GFOA points out that such agreements allow for greater continuity and help to minimize the potential for disruption in connection with the independent audit and can also help reduce audit costs by allowing auditors to recover certain "start-up" costs over several years, rather than a single year. The appropriate length for the audit services contract is left to the judgment of the entity. However, as the auditor selection process established by law is intended to ensure selection of a qualified auditor and satisfactory audit effort, entities should avoid establishing excessive contract periods. • Additional Contract Elements. Additional elements that are recommended by the GFOA Handbook44 to be made a part of the audit services contract include: o An independence assertion by the auditor. o Language describing the actions to be taken in the event of a disagreement as to whether certain procedures are within the scope of the contract. o Provisions to assure the availability of the auditor's services to aid the entity in the defense of claims that may arise as the result of audit work. 42 AICPA Professional Standards,AU-C Section 210.A23. 43 AICPA Professional Standards,AU-C Section 210.A23. 44 GFOA Handbook,Chapter 6,pages 85 through 87. Page 15 o Language concerning opportunitiesfor socially and economically disadvantaged individuals (such language may be required bv law orroguhation). o C|ahhoaUmn of the auditor's duty to maintain the confidentiality of certain sensitive information. o Provisions establishing the entity's rights to terminate the contract and the procedures for doing so. o Stipulation as to how the value of the auditor's vvodo is to be determined if the engagement is terminated prior to completion. o Language establishing the auditor's sole liability for claims arising from the auditor's performance of the engagement. o Language requiring both the entity and the auditor to attempt to resolve disputes amicably. o Language requiring formal notification to the other party in the event of a disagreement(e.g., a disagreement over the scope of the audit) and indicating what is to be considered notification in such instance (m.0.. registered nnai|). o Language specifying how the terms ofthe contract can be waived ormodified. o Language clarifying that the contract's separate provisions are to stand alone, oo that ufailure bo meet one provision does not nullify the entire contract. o A requirement for the auditor bo obtain insurance coverage. o A prohibition against the auditor's delegating or subcontracting audit work without the entity's permission. In developing audit contracts, entities should consider an article m titled Contract Issues for Governmental Audits that was jointly developed bythe AICPA and GFOAto educate governments and their auditors about clauses in contracts and engagement letters in the governmental environment that may not meet^4/CFAProfessional Standards and that may create uncertainty about the auditor's independence. As shown above, different professional organizations have placed varying emphasis on the contents of the contract for audit services. Entity nnmneQennent must determine the most appropriate provisions for a contract in o given set ofcircumstances. The mpaoiho elements and language to be included within o contract will ultimately be a matter of agreement between the entity and the audit firm. *oA link 0o this article is provided in the GFOABest PnooUoe: Audit Procurement(March 20O9). Pmge16 218.391 Auditor selection procedures. /1\ Each local governmental entity, district school board, charter sohoo, or charter technical career center, prior io entering into o written contract pursuant bosubsection /7\. except aaprovided in subsection (B), shall use auditor selection pn0oedunya when selecting an auditor to conduct the annual financial audit required |nm. 218.39. i2\ The governing body of a county, municipality, special d|str1ct' d|sthct school board, charter school, or charter technical career center shall establish an auditor selection committee. (a) The auditor selection committee for a county must, at a rnininnurn, consist of each of the county Cffioena elected pursuant to the county charter or s. 1(d). Art. \/||| of the State Constitution their respective designees, and one member of the board of county commissioners or its designee. (b) The auditor selection conmnnidmm for a mnunioipa|itv, special dim1hct, district suhmm| bomrd, charter school, or charter technical career center must consist ofsd least three members. One member ofthe auditor selection committee must be a nnernhmr of the governing body of an entity specified in this paragraph, who shall serve aothe chair ofthe committee. (o) An employee,achief executive officer,or a chief financial offim*rof the county,municipality,special distdct, district auhpV| boerd, charter school, or charter technical career center may not emn/e as a member of an auditor selection committee established under this subsection; however, an employee, a chief executive officer, or a chief financial officer of the countv, municipality, special disthot, district school-board'-charterschool, or-charter technical career contarnmayaan/ein-an'mdVioory-oapmcib/�-- (d) The primary purpose ofthe auditor selection committee isto assist the governing body inselecting an auditor to conduct the annual financial audit required in s.218.39; however,the committee may serve other audit oversight purposes as determined by the entity's governing body. The public may not be excluded from the proceedings under this section. (3) The auditor selection committee shall: (m) Establish factors to use for the evaluation of audit services to be provided by a certified public accounting firm duly licensed under chapter 473 and qualified toconduct audits inaccordance with government auditing standards ag adopted bx the Florida Board of Accountancy. Such factors shall inc|ude, but are not limited to, ability of penaonne|, experienom, ability to furnish the required servioem, and such other factors as may be determined by the committee to be applicable to its particular requirements. (b) Publicly announce requests for proposals. Public announcements must inc|udm, at a mininnurn, m brief description ofthe audit and indicate how interested firms can apply for consideration. (o) F»nox4de interested firms with m request for proposal. The request for proposal mhmU include information on how proposals are to be evaluated and such other information the committee determines ia necessary for the firm to prepare aproposal. (d) Evaluate proposals provided byqualified firms. |f compensation ioone of the factors established pursuant to paragraph (a)' it shall not bethe sole or predominant factor used to evaluate proposals. (e) Ranh and recommend in order of preference no fewer than three firms deemed to be the most highly qualified to perform the noqu|nmd emn/ioes after considering the factors established pursuant to paragraph (a). |f fewer than three fimno respond to the request for proposal, the committee shall peoonnrnmnd such firms as i1 deems to be the most highly qualified. (4) The governing body shall inquire of qualified firms as to the basis of compensation, select one of the firms recommended by the auditor selection omnnnnUtee, and negotiate a oordnmot, using one of the following methods: PaQe17 (a) If compensation is not one of the factors established pursuant bmparagraph (3)(a) and not used to evaluate firms pursuant bo paragraph 0Ve)` the governingbody shall negotiate eomntract with the finn ranked first. If the governing body is unable to negotiate a satisfactory contract with that finn, negotiations with that firm shall be formally terminated, and the governing body shall then undertake negotiations with the second-ranked firm. Failing accord with the second-ranked fimn, negotiations shall then be terminated with that firm and undertaken with the third-ranked firm. Negotiations with the other ranked finnashall be undertaken in the same manner. The governing body, in negotiating with firms, may reopen formal negotiations with any one of the three top-ranked firms, but it may not negotiate with more than one firm sdatime. (b) If compensation is one of the factors established pursuant to paragraph (3)(a) and used in the evaluation of proposals pursuant to paragraph (3)(d\, the governing body shall mehuot the highest-ranked qualified firm or must document in its public records the naemon for not selecting the highest-ranked qualified firm. (o) The governing body may select a firm recommended by the audit committee and negotiate contract with one of the recommended firms using an appropriate alternative negotiation method for which compensation im not the sole or predominant factor used to select the firm. (d) In negotiations with firms under this section, the governing body may allow a designee to conduct negotiations on its behalf. (5) The method used by the governing body to select a firm recommended by the audit committee and negotiate a contract with such firm must ensure that the agreed-upon compensation is reasonable bo satisfy the requirements ofs. 218.39 and the needs ufthe governing body. (G) |f the governing body io unable tmnegotiate a satisfactory contract with any mfthe recommended firms, the committee shall recommend additional firms, and negotiations shall continue inaccordance with this section until on agreement imreached. (7) Every procurement of audit services shall be evidenced byawritten contract embodying all provisions and conditions of the procurement of such services. For purposes of this oectinn, on engagement letter signed and executed by both parties shall constitute m written contract. The written contract shall, at m rnininmunn, include the following: (e) Aprov/oion specifying the services to he provided and fees or other compensation for such services. (h) /\ provision requiring that invoices for fees or other compensation be submitted in sufficient detail to demonstrate compliance with the terms of the contract. (c) A provision specifying the contract pariod, including renavva|o, and conditions under which the contract may be terminated or renewed. /8\ Written contracts entered into pursuant to subsection (7) may be renewed. Such renewals may be done without the use of the auditor selection procedures provided in this section. Renewal ofa contract shall bo|nwriting, (g) If the entity fails to select the auditor in accordance with the requirements of subsections (3)-(8), the entity must again perform the auditor selection process in accordance with this section hoselect an auditor hn conduct audits for subsequent.fiscal years. History'—n. O5. ch. 2001-366; s. 1. ch. 2OO5-32; a. 15, ch. 2010-15. Page 18 Appendix BI »Questions and Answers General 1. : Are the auditor selection requirements of Section 218.391, Florida Statutes,to be applied whenever a local governmental entity(entity) contracts with a CPA firm for any audit services? Answer: No. Section 218.391, Florida Statutes, applies only to contracting for the financial audit required by Section 218.39, Florida Statutes. However,the use of selection procedures provided for in Section 218.391, Florida Statutes, and other Federal, State, or local laws is advisable when contracting for any audit services. 2. align: Is there a legal requirement or recommendation for mandatory rotation of auditors after a specified number of years or at the end of an audit services contract? Answer: No. Unless the entity has established its own mandatory auditor rotation requirement, there is no legal requirement for the mandatory rotation of auditors. The current auditor may be included in the auditor selection process at the end of the current audit services contract. The GFOA's Best Practice: Audit Procurement (March 2019) provides "While there is some belief that auditor independence is enhanced by a policy requiring that the independent auditor be replaced at the end of the audit contract ... the frequent lack of competition among audit firms fully qualified to perform public-sector audits could make a policy of mandatory auditor rotation counterproductive. In such cases, it is recommended that a governmental entity actively seek the participation of all qualified firms, including the current auditors, assuming that the past performance of the current auditors has proven satisfactory.' 3. U 2 '+ 0: If an entity is satisfied with the existing auditor and can negotiate acceptable fees, can the contract for financial audit services be renewed without going through the auditor selection procedures required by Section 218.391, Florida Statutes? Answer: A contract for financial audit services can be renewed only as provided in the contract, which is required to include a provision specifying the contract period, including renewals. 4. igp: Are the auditor selection procedures required to be used only when an entity decides to change auditors or initiate a request for proposals process? Answer: No. The revised auditor selection procedures are required to be followed when an audit contract period expires. The audit contract is required to include a provision specifying the contract period, including renewals. 5. uestio�n: Chapter 2019-15, Laws of Florida, effective July 1, 2019, amended Section 218.391(2), Florida Statutes, to revise the requirements for establishing the auditor selection committee and appointing committee members. Does this impact an audit services contract that was in effect at July 1, 2019? Answer: No. An audit services contract that was in effect at July 1, 2019, can remain in effect through the end of the original contract term, including renewals. Entities are required to comply with the new auditor selection committee requirements for auditor selection procedures initiated after July 1, 2019. 6. loj3: Are audit services contracts required to include renewal option provisions? Answer: No. The contract is not required to include a renewal provision; however, a contract cannot be renewed in the absence of such a provision. Page 19 7. Is there a minimum or maximum number of years that an audit contract must cover? No. The audit services contract must specify a contract period including renewals, but the law does not specify a minimum or maximum number of years that an audit services contract must cover. This isleft tm the discretion mYthe entity and iee matter cf agreement between the entity and the audit firm. The entity should use prudent business practices in establishing the contract period. 8. Section 218.381(4)(c), Florida Statutes, provides that m governing body may select o firm recommended by the auditor selection oDrDOnittae and negotiate a contract with one of the recommended firms using an appropriate alternative negotiation method. Which specific provisions of the law may be considered nonmandatory under this provision by the applicatiull uf an alternative methodology? Answe : Regardless of the negotiation method used, an entity's governing body must establish an auditor selection committee pursuant to Section 218.391/2\, Florida Sta1Vtaa, and the auditor selection committee must perform its functions in accordance with the requirements of Sectimn218.3B1(3), Florida Statutes. Regardless of the method used to sa|aot the audit firrn, compensation may not be the sole or predominant factor used to select the finn (Section 218.381(3)/d\mnd (4)/c\. Florida Statutes). 9. : Can mn auditor selection committee ratify,after the fact, arequest for proposal previously developed and issued by City personnel without the auditor selection committee's involvement? Answer: No. An auditor selection committee's statutorily prescribed function to exercise its discretion to create(and provide interested firms with)a request for proposals may not be delegated to o subordinate or other entity absent statutory authorization (see Attorney General cJpinion2O12-31\. 10. Can an entity select mn auditor to conduct a financial audit pursuant tm Section 21M.39. Florida Statutes, by piggybacking off of another entity's audit contract? Answe : No. Pursuant to Section 218'391(2). Florida Statutes, an entity seeking such audit services must establish an auditor selection committee and the committee must apply the auditor selection procedures prescribed by Section 218.391/3\' Florida Statutes. This law does not include aprovision that would allow for piggybacking,and an auditor selection committee's statutorily prescribed function may not be delegated to a subordinate or other entity absent statutory authorization (emm Attorney General Opinion 2O12-31). 11. Question: Are auditor selection committee meetings subject to the Sunshine Law(Section 286.O11. Florida Statutes)? Answe : Yes. Auditor selection committee meetings are subject to the Sunshine Law(i.e., noticing meetings and keeping minutes for all meetings) because the committee is not just fact-finding in nature but also makes decisions in ranking proposals and recommending to the governing body firms deemed bobe the most highly qualified to perform the auditing services. See discussion regarding application of the Sunshine law to advisory boards in Part 1, Section B.1, of the Attorney General's Government-in-the-Sunshine Manual. Auditor Selection Committee 12. : Section 218.391/2\(o). Florida GtatuLee, provides that the auditor selection committee for a county must,st a minimum, consist of each of the county officers elected pursuant to the county charter or Article l/|||. Section 1(d) of the State Constitution mr their respective designees and one member ofthe board of county commissioners or its designee. May m county officer (i.o.. clerk of the court, sheriff, property appraiser, tax collector, supervisor of elections, or any other such officer in whom any portion of the fiscal duties of the such offimarm are under |avv separately placed) designate an employee of the county officer to serve in place of the county officer on the county's auditor selection committee? Page2O Pursuant to Section 218.391(2)(c), Florida Statutes, an employee of a county cannot serve on the county auditor selection committee. The term "employee' is not explicitly defined for purposes of applying this law; however, the term "county" as used in Section 218.391(2)(a), Florida Statutes, encompasses county officers and the board of county commissioners, indicating that the legislature intended the restriction imposed by Section 218.391(2)(c), Florida Statutes,to apply to employees of a county officer or of the board of county commissioners. Accordingly, a county officer may not designate an employee of a county officer to serve in place of the county,officer on the county auditor selection committee. However, the employee may serve in an advisory capacity for the auditor selection committee. 13. Qu eye ti2p: Section 218.391(2)(b), Florida Statutes, provides that the auditor selection committee for a municipality, special district, district school board, charter school, or charter technical career center must consist of at least three members, and one member must be a member of the governing body who must serve as the committee chair. Does this mean that only one member of the governing body may serve on the committee? AnjWgr. No. The committee can have as many members of the governing body as desired, but at least one member must be a member of the governing body who must be the committee chair. Dependent Spepial Districts 14. OU211igp: A dependent special district exceeds the audit threshold established by Section 218.39, Florida Statutes, and must provide for a financial audit requirement. Although the district is audited as part of a county or municipality pursuant to Section 218.39(3)(a), Florida Statutes, the district — -opts to also provide for a separate financial audit. Does the district have to select the auditor for the separate financial audit in accordance with Section 218.391, Florida Statutes? AnIME: No. As the district is not required to provide for a separate financial audit pursuant to Section 218.39, Florida Statutes, it is not required to follow the auditor selection procedures prescribed by Section 218.391, Florida Statutes, However, the use of such selection procedures is advisable to help ensure selection of a qualified auditor and satisfactory audit effort. 15. Qu2,1ti2n: A dependent special district exceeds the audit threshold established by Section 218.39, Florida Statutes, and must provide for a financial audit requirement. The district opts not to be audited as part of a county or municipality pursuant to Section 218.39(3)(a), Florida Statutes, but instead opts to provide for its own financial audit. Does the district have to select the auditor in accordance with Section 218.391, Florida Statutes? Aos)&eE: Yes, As the district is required to provide for a financial audit pursuant to Section 218.39, Florida Statutes, it is required in this situation to follow the auditor selection procedures prescribed by Section 218.391, Florida Statutes. 16.QUI%fi=: A dependent special district does not exceed the audit threshold established by Section 218.39, Florida Statutes; however, the district opts to provide for a financial audit. Does the district have to select the auditor in accordance with Section 218.391, Florida Statutes? AUSME: No. As the district is not required to provide for a financial audit pursuant to Section 218.39, Florida Statutes, it is not required to follow the auditor selection procedures prescribed by Section 218.391, Florida Statutes. However, the use of such selection procedures is advisable to help ensure selection of a qualified auditor and satisfactory audit effort. ComrrigniLy Redevelopment Agencies 17. gUgl1ion: A community redevelopment agency(CRA)exceeds the audit threshold established by Section 163.387(8), Florida Statutes, and must provide for its own financial audit. Does the CRA have to select the auditor in accordance with Section 218.391, Florida Statutes? Ap&Mi,q : No. Section 218.391, Florida Statutes, applies only to audits required by Section 218.39, Florida Statutes. Section 163.387(8), Florida Statutes, does not specify how the CRA is to select an Page 21 174r.IM ISM 22. Qugslion: If compensation is 20 percent of the ranking criteria and all other factors are each less than 20 percent, is compensation then the predominant factor, or must it be predominant of all factors combined, i.e., greater than 50 percent of all combined? Answer: "Predominant" is not defined in the law with respect to auditor selection. Certainly, weighting compensation at greater than 50 percent of all combined factors, would constitute "predominant." Black's Law Dictionary defines "predominant" as "Something greater or superior in power and influence to others, with which it is connected or compared." Noncom fiance With Auditor Selection Law, 23. QU2jjjgO: Pursuant to Section 218.391(9), Florida Statutes, if an entity fails to select the auditor in accordance with Section 218.391(3)-(6), Florida Statutes, the entity must again perform the auditor selection process in accordance with this section to select an auditor to conduct audits for subsequent fiscal years. Does Section 218.391(9), Florida Statutes, apply to a situation where an entity selects an auditor to conduct a financial audit required by Section 218.39, Florida Statutes, without use of an auditor selection committee appointed by the entity's governing body? Answer: Yes. An entity cannot comply with Section 218.391(3), Florida Statutes, unless the entity's governing body has established an auditor selection committee to carry out the responsibilities prescribed by Section 218.391(3), Florida Statutes. 24. Qu2sil2n: An entity is notified that its auditor engaged to conduct a financial audit required by Section 218,39, Florida Statutes, was not selected in accordance with the requirements of Section 218.391(3)-(6), Florida Statutes. What should the entitydo? Answer: The entity should carefully review its auditor selection process to ensure compliance with Section 218.391(3)-(6), Florida Statutes. In doing so, the entity may want to consult with its legal counsel. If it is determined that the entity did not select the auditor in accordance with Section 218.391(3)-(6), Florida Statutes,the entity, at a minimum, must perform the auditor selection in accordance with Section 218.391, Florida Statutes,for the subsequent fiscal year audit as required by Section 218.391(9), Florida Statutes. However, if possible (e.g., an audit contract for the current fiscal year has not been executed, or if executed, can be legally terminated without significant financial costs, and there is sufficient time to reselect the auditor and comply with the audit report submittal deadline), the entity should reperform the auditor selection process for the current fiscal year audit. 25. Question: An auditor becomes concerned (e.g.,through the process of responding to a request for proposal for audit services)that an entity may not be selecting an auditor to conduct a financial audit required by Section 218.39, Florida Statutes, in accordance with the requirements of Section 218.391(3)-(6), Florida Statutes. What should the auditor do? Answer: The auditor should notify the entity's governing body of the concern. The entity may not be aware of the Section 218.391, Florida Statutes, auditor selection requirements or that its auditor selection process is not in accordance with that law. At a minimum, the auditor's notification should help ensure the entity's future compliance with Section 218.391, Florida Statutes. Also, depending on the timing of the auditor's notification, the entity may decide to reperform the auditor selection process. Auditors should also consider refraining from responding to a request for proposal for audit services from entities they know to be in violation of Section 218.391, Florida Statutes. Page 23 Anvendix C -Auditor Selection and Auditor Selection Committee Resources AICPA Audit Committee Effectiveness Center (www.aicpa.orgi/forthet)ublic/auditcommitteeeffectiveiless) AICPA Professional Standards promulgated by the American Institute of Certified Public Accountants as of July 1, 2019. Audit Management Handbook, Stephen J. Gauthier, Government Finance Officers Association (1989) (Note: Publication of this Handbook was discontinued several years ago as a result of 1996 changes to the Federal Single Audit Act and changes in GFOA policy; however, the references to the Handbook in this guidance are consistent with current GFOA policy.) Choosing an External Auditor. A Guide to Making a Sound Decision, Mid-America Intergovernmental Audit Forum (August 2007) (www.ni.gov/hunianseivices/olra/ocr)m/resources/tiDs/Mark ExtAuditor2. ffl GFOA's Best Practice: Audit Procurement (March 2019), Government Finance Officers Association (wwwgfoa,oEg/best-gractices/iiiteriial-gLotitrols) GFOA's Best Practice: Audit Committees (October 2008), Government Finance Officers Association (www.gfoa.org/best-gractices/internal-controls) Government Accounting, Auditing, and Financial Reporting (2012), Government Finance Officers Association Government Auditing Standards issued by the Comptroller General of the United States (www.gao.gov/y,ellowbook How to Avoid a Substandard Audit. Suggestions for Procuring an Audit(May 1988), National Intergovernmental Audit Forum (www.gao.gov/12roducts/137493) Public Procurement Guide for Elected and Senior Government Officials promulgated by the NIGP: Institute for Public Procurement (2016) (www,nigp.or g/homelfind-procuremelit- resources/elected-officials-r)rocurement-gwide) Page 24