August 25, 2004
Members Present: Larry Ladd, Chris Reece, Ed Merck, Jerry Gabert, Will Saunders, Darwin Smith, Jerry Gabert, Florence, Einhorn, Glenn Charbonneau
Ladd gave a brief history of the Rice Room as well as the story behind Rice and Greeley and the AUA / UCA merger in 1961.
Quick introductions were done as Einhorn was not at the April meeting.
Gabert presented background information on the schedule for the FY04 audit. The Committee asked for the management letter to be ready for the October 2004 Audit Committee / BOT meeting. Merck said that we should be clear on the Management Letter, he said that we want them to be picky but with more of a systemic approach rather than detailed with focus on management control. Smith said the committee and the auditors should be looking at missed opportunity and there needs to be a conversation between the Audit Committee and the auditors without any staff present. Saunders wanted to know why D&T weren’t more detailed in the past. Ladd said, speculatively, that when we asked them for a higher view that this team of auditors does not have the skill sets to provide this information. Gabert added that this is an issue to be considered during the RFP process.
Jim Winning, audit partner representing D&T, joined the meeting at 9:20. Winning presented a brief synopsis of the audit plan for the FY04 audit. Reece asked that Winning specify where in the plan there were differences between this year’s plan and previous years. Ladd asked that if there was someone on site that has trade publishing experience. Winning noted that a consulting partner in their Long Island office has provides such a technical review. Saunders expressed his disappointment that there wasn’t a local auditor with experience in these areas. Winning said he didn’t see this as a problem since methodology is only a small area of the audit. Specialized auditors are not necessary for the purpose of conducting such a review. Winning described the background of Sarbanes-Oxley and the role of the auditors during the audit. (Please reference the 2004 Audit Plan handout for further detail.) Ladd asked about the internal control aspect of the audit. Winning said the auditor’s purpose is to conduct an audit of the financial statements and if they aren’t comfortable with certain aspects, they then look into the internal control procedures. The auditor does need to become familiar with the internal controls to understand the financials. They do not however, audit the internal controls based on the number of transactions the UUA has. The auditors seek confirmations from banks and loan customers but not from vendors. Reece asked some questions about the volume of work involved with testing internal controls over transaction auditing. Reece requested information about billable hours versus invoiced amounts and planned amounts of time on an annual basis. Winning gave information on FAS 116, 117, and 124 and what they require. Winning said that another issue is looking at donor-restricted funds and making sure that allocation of these funds and accounting for them is properly recorded. Winning also said they look at certain numbers and projections, which are based on highly subjective numbers, for instance the royalty projections on BP books. Winning described the timing of the audit. The draft financial report will be available on September 24th. The target is to mail out the management letter to the Audit Committee the first week of October and no later than October 8th. Merck asked for some discussion on the content of the management letter. He would like more systemic conversation rather than detailed “nitpicking”. Are there things that we should be doing? Smith said that this might be a matter of being forward thinking rather than backward thinking which auditing typically is. Are there best practices out there that we are not looking at? Winning made it clear that while they can draw comparisons, they cannot and will not act as business advisors. Reece said that he needs to be comfortable in his sense that the auditors are being thorough before he can sign off on the audit and report to the BOT.
Lucia Santini-Field, Chair of Investment Committee, and John Pattillo, Chair of Congregational Properties and Loan Commission joined the meeting. Their presence was requested because of the nature of their committees’ work and the relationship to the audit and the financial statements. At the last meeting Santini-Field had said that she didn’t feel the audit was particularly useful to her committee. Winning said the requested end results need to come from the end user. Winning summarized that the two issues were making the statements more user friendly and also increasing the comfort level for the committees. Pattillo also said that he would be comfortable with providing summarizing information in to the footnotes but we don’t need the level of detail provided to committees. Darwin clarified that the footnotes are compiled by the Treasurer’s office but should come from the committees or departments. Merck said that one way the auditors can be successful in this is to bring suggested alternatives or examples of other ways in which investment accounting reporting has been approached in other not-for-profit organizations. Santini-Field recommended that we look at other religious groups and see what reporting they use other than full blown financial reporting. Pattillo agreed to have the CPLC quarterly reporting provided to the committee.
Added to last meetings notes: As amended, Merck questioned the meeting notes Capital Campaign funding. We wanted to make sure there was clear reporting as to the actual costs and the sources of the campaign. Also, clear reporting for comparison purposes as to the types of funds raised. It was discussed that using unrestricted funds for raising restricted funds is not exactly a one-for-one match. Merck said it easy to lose focus of exactly what the campaigns are for. Change spelling of Reese to Reece.
Larry is still happy.
MSP: Approve the minutes as amended.
Ladd moved on to the RFP for the audit. Gabert sent out copies of the previous RFP from November 2000. Gabert will look at Ernst & Young, Deloitte & Touche, PriceWaterhouseCoopers, McGladrey & Pullen, Tonneson & Company, KPMG, Mike Burns, Tofias PC and others that may be used by other religious denominations. We last looked at firms that are national in function because of the UUA footprint. If this is no longer a primary “screen” then we will also consider regional auditing firms. Saunders asked if we could discuss this further. Ladd said the ‘pro’ reason is to reassure various stakeholders and concerned parties that we are using a well-known brand name. Smith suggested that rather than having a conversation around having a national versus regional search we instead do a search by “business” segment. Ladd said this is what we looked for in our previous bidding process. Saunders feels the other key issue is the BP issue, where it is critical that we have competent auditing experience and he doesn’t think we’re receiving now. Saunders asked if we could check with other similar organizations to see who they have as auditors and their impression of the services they receive. Reece said that with the focus on BP and nonprofits we should consider different auditors for each segment. Smith is concerned with cost because of the fact that BP financial statements are both separate and consolidated with the UUA statements. Merck said we have to remember we’re small potatoes in the grand scheme of things. We are not going to get everything so we should decide what’s important to us and set priorities. Saunders said it’s better to go with a regional firm that sends us their best partner than a national firm that will send us less than their best. Reece agreed. We won’t rank as a large account with one of the big 4 firms. He said it might be better to go with a larger regional firm where we represent a significant customer. Smith said that maybe we shouldn’t focus on BP. He questioned the wisdom of focusing on BP but not doing a full audit of the General Investment Fund. BP is the hot button now but will it continue to be? Smith said the RFP should perhaps be rewritten to say that we are in fact an amalgamation with a current specific focus on publishing. Merck said that if Grant Thorton were really a great match why commit to another firm for three years because of a conflict of interest (Ladd is a partner there). Reece believes the threat of another poor audit by D&T might well outweigh the benefit of waiting. Saunders asked why we are excluding Grant Thorton if Ladd is leaving his position as Financial Advisor. Einhorn and Smith raised points that even if we take precaution in regards to conflict of interest it could very well be viewed as such anyway. Merck asked for clarification on whether this was an indictment of Deloitte or are we more just unhappy with their overall service over the years. Ladd said that on the whole we have just been unhappy with their commitment level and attention to detail. Einhorn said we have had some issues with staff although that has been better in recent years. She also feels that their lack of knowledge around certain non-profit practices is hindering the services that we are being provided. Smith asked if we should inquire at Deloitte for a different partner. Ladd said that they do not have another non-profit audit partner in Boston. Saunders asked about what kind of leverage we have. Reece said that he wants to be comfortable as to why we are not happy with Deloitte. Reece wanted to make sure that we just feel that we are not getting enough but they are certainly holding us to GAAP and Generally Accepted Auditing Practices. Ladd clarified that we are on a year-to-year basis with Deloitte and are not under a long-term commitment. Saunders suggested we refashion our RFP to not limit it to national firms. Smith said we need to consider that Deloitte’s lacking may be a lacking personality rather than a lack of corporate functionality. Reece proposed we do a business segment search rather than national versus regional. Saunders said he’s enthusiastic. For pricing on the proposals Reece would like to see it broken out what pricing would be to look at the segments of the UUA, BP, and the Endowment and in combinations thereof. Merck believes we need to have more conversation on the Endowment before we get in to auditing. It’s important to have a conversation regarding investment practices but he doesn’t know if that’s within the realm of responsibility of the Audit Committee. Reece said he is hearing three different things, the GIF needs to be audited, the GIF needs financial statements, the Auditors need to create financial statements and then audit them and that the third item cannot happen. Merck said there needs to be more clarity between accounting and reporting.
Gabert handed out an article from the Wall Street Journal dealing with Fidelity Investments who administer our defined contribution retirement plan. Our plan currently has approximately $127,000,000 in it. Fidelity was fined $2,000,000 for illegal issues in the West Coast that did not affect customer accounts and did not impact our holdings. No action is necessary; this is solely meant as an FYI in case committee members are questioned on this matter. Ladd said Fidelity is not a great corporate citizen because of their investing practices. This has been contentious in the past because some see Fidelity as a service provider for the UUA and question why we selected them.
Ladd moved on to drafting the Audit Committee Charter. Ladd created a draft charter that was modeled in part on the Investment Committee’s rules and regulations. Smith said we need to frame this within the context of the committee role and functions. Most of the bullets are likely to be due diligence but should it be forward looking in focus? Merck said that his experience with audit committees is that they function internally rather than globally. Saunders said he cannot speak for the Finance Committee but he feels they would be happy to see the Audit Committee take a more global role. Questions were raised as to whether a global role should be codified within the Charter or should it be practice. Saunders and Smith expressed the opinion that it should in fact be codified. Saunders feels that the word planning should be avoided because of political reasons within the board. Smith will supervise revisions of the charter via email.
October 12 Meeting
- Review of draft management letter
- Review with Santini-Field for Endowment issues.
- Meet the UUA’s Financial Services Staff Group
- Status report on the RFP (redrafted letter) and list of firms who will receive it.
- Detail from Deloitte & Touché on budget versus actual billing and restricted funds accounting.
Merck said we need to be very clear with Lucia about what she would like to talk about and what we would like to talk about. Merck will contact Lucia regarding framing our next meeting’s conversation.
Date for January Meeting 1/18/2005 possible extension to two days using 17th and 18th.