Choosing an outside auditing firm; where does a conflict of interest lie?

Sitting at a Templeton meeting of selectmen, I watched the Templeton town accountant speak up on behalf of a particular auditing firm and that should concern town residents. That firm will be checking the accountant's work. The selectmen, town administrator, accountant and treasurer/collector should have no say and should not even be in the room when it comes to choosing an audit firm because of that conflict of interest.

from the Massachusetts Technical Assistance Bureau (TAB)

Often the most important steps a municipality can take occur long before the audit is conducted. An audit’s quality is directly related to the auditor’s knowledge, experience, and professionalism. Therefore, when selecting an outside auditor or audit firm, TAB recommends the appointing authority be independent of those who will be the subjects of the audit. Many municipalities create audit committees to fulfill this and other functions.

In general, members of the financial offices and a manager/administrator should be excluded from the audit committee and the auditor hiring process to avoid the potential for, or appearance of, conflict, since reviews effectively report on their performance. On the other hand, members of the town finance committee or city council are potential candidates. Residents with appropriate work experience or professional backgrounds can also make valuable contributions to an audit committee.

 It happens that municipalities will rely on one auditor or audit firm for multiple years. In fact, the Government Finance Officers Association (GFOA) recommends that communities engage the same auditor by entering into multiyear agreements, or a series of one-year contracts, for a term of at least five years. A multiyear agreement allows for greater continuity and enables a new auditor to spread initial start-up costs over multiple years, potentially reducing costs in the initial years. However, after this term, the GFOA recommends a full, competitive selection process and a rotation of auditors after each multiyear agreement, provided there is adequate competition among qualified auditors. Contracting with a new audit firm not only brings a fresh perspective, but it also reflects good practice. In general, communities are encouraged to re-advertise for auditing services every five to eight years. The GFOA acknowledges that there may be circumstances or locations where there is a lack of competition among fully qualified auditors. In such cases, participation of the current auditors is acceptable, assuming their past performance has been satisfactory and conformed to industry standards.

posted by Jeff Bennett