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January 18, 2005

Rice Room – Eliot & Pickett House

Present: Merck, chair, Reece, Saunders, Smith, Gabert, staff liaison
Absent: Larry Ladd
Also Present: Charbonneau, Rutherford, Einhorn, Crowell
The meeting convened at 9:03 a.m.

Deloitte & Touche

Jim Winning
Jim Winning from Deloitte & Touche (D&T) joined the meeting to present D&T’s proposal for auditing services for FY05. Winning has worked with UUA for the last six years and D&T has audited the UUA for 16 years. While the UUA is not the largest organization that Winning serves, the UUA is perhaps the most complex organization given its structure and holdings. Winning provided information on his experience and provided information on the auditing team. The proposed team will be unchanged from the previous two years. Fees would total $97K for the UUA including Current Operations, Congregational Properties & Loan Commission, and the General Investment Fund and $34K for the Beacon Press audit. (Fee increase approx. 30%) Increased fees are the result of fee structure increases as mandated by D&T management due to increases in the cost of services provided across the board. Reece asked other than the continuity issues what is the benefit of using D&T given the significant increase in fees. Winning answered that the familiarity of D&T with UUA’s complex structure and holdings makes D&T a better candidate because their proposal probably most accurately reflects the work to be done. Rutherford asked what would cause the BP fees to more than double. Saunders asked how Winning would approach the UUA differently than previous years. Winning said one obvious change would be to get input from the audit committee far earlier than this past year. Winning would not dramatically change the approach of the audit since previous years have been fairly successful. He’ll continue to have ongoing communications with management. Smith asked if there were ways to significantly reduce the number of hours charged if say Finance took on more work. Winning said that there were no significant hours that could be reduced and, if we mandated that, he would not be likely to accept the engagement. Reece asked if D&T were a new group coming in what would be their big selling point. Winning said D&T business scope and experience is a big selling point as well as D&T commitment to providing auditing services to not for profit organizations.

Merck arrived, welcomed everyone to the meeting, and asked for a review of collective thoughts about the presentation. Saunders gave a brief blessing. Smith commented that it is more about the actual process of the audit than the cost per se. Saunders has been frustrated, in the past, with D& T’s lack of business/best practice recommendations. The group discussed the kind of recommendations the Association should be looking for. We should look for the auditors’ views in interest and communications, fee, style, management letter, dimension and scope and additional services.


Steve Caron and Chris Brathas
KPMG joined the meeting. Caron is a partner in the not for profit sector and does almost all of his work in non-profit. Brathas is a senior manager and does all of his work in not-for-profit. Brathas stressed that they have a whole infrastructure of their section of KPMG dedicated to the non-profit sector. KPGM needs to have access to the audit committee. Smith asked when the reviewing concurring partner gets involved. Caron responded that from day one the reviewing partner is involved and that in some respect it is a parallel process. Both Caron and Brathas deal with firms with significant (if not larger than BP) publishing sectors. KPMG has access to another dedicated auditor in charge of publishing that they can tap if issues come up. Saunders clarified that they will be available on a consulting basis but they will not be available as part of the team. Caron said that he did not think this was a major issue because most of BP fell within their own scope of work. Reece asked how KPMG will get familiar with the processes here given that they’re new. Brathas said they have several methods including questioning staff, access to previous auditors’ files, internal memos, and templates to get up to speed quickly. Reece further asked if part of this process would involve immediately notifying management if there were irregularities or oddities in functioning. Caron said absolutely. This is one of the advantages of periodically changing firms. Caron said the start-up time is part of KPMG’s time and would not be billable hours. Reece asked about communication protocols between KPMG and both the audit committee and management. Caron said there were several ways to handle this but most communications with the Audit committee will be in the form of a letter to management with management’s response and timetable for correction. In response to a question from Reece, Caron said their biggest contribution would likely be in the areas of reporting and internal controls. Merck asked about the line between auditing and business best practices. Brathas said their focus is obviously on key business practices and they are available on a case by case basis. They will draw attention to any issue if it is noticed. Specific question (Merck) re. Management Letter: would they go beyond pure audit-related observations? Answer: yes. Example of management relationship with Beacon Press/knowledge of their financial controls. KPMG pledges to communicate observations/issues as they go along. Review of timetables: “Get in early and often.” Response was positive. General reviews were that KPMG would be a good fit.

McGladrey & Pullen

Jim Mecone; Joe Mahoney, Alexandra Reagan
Mecone introduced his group which would be part of the auditing team. McGladrey’s not-for-profit section goes back to 1977. Most of their current clients are long-term clients. Their proposal includes fees for the services requested while acknowledging that some services may change or be fluid. Mahoney has experience within both the non-profit and for profit sectors and will focus on BP. Reagan’s responsibility would be as a point person between McGladrey and UUA Management. Her focus has been solely non-profit and clients include UUWF. Mecone listed the items they would look at, review, and possibly suggest changes in presentation for some of the information in the audit report. In response to a question from Saunders, Mecone said that some interest is in the mission. Mecone said he feels that his group is the most experienced auditing firm in the Boston area. Mahoney said that anyone can do an audit; it’s a regurgitation of historical data. Mahoney said the interest, experience, and push is in the management letter. Reagan stressed their team approach.

Mecone said that while they are the 5th largest accounting firm they have less than 100 publicly traded companies. It lowers their public profile. The firm may be national but it is regional / local in feel. Merck asked for some expansion on Mahoney’s comment on the management letter. Mahoney said that the management letter can be used as a tool to comment on best practices in comparison to other businesses. Mecone said there were also levels of communication in the management letter between required information and general recommendations. Another area of expertise they are able to bring is a focus on tax issues.

After the reps left, some conversation took place around the presentation. Reece said that he liked their local focus. Reece however didn’t buy into their level of passion. Smith said there is a philosophical question as to whether or not we should be using one of the big four auditing firms. Smith said that there is this aura of our appearance in the eyes of donors if we don’t use one of the major auditing firms. However, Smith feels that we’ll get more attention from a smaller firm because we are a much bigger fish in their bucket. We’ll be a major client. Merck agreed but he felt their energy level was not great. Merck likes the reach and depth of KPMG. Reece said that accessibilities is only one issue. He further said that something to keep in mind is that we are not a Wall Street firm. Rutherford said that to her the references are the key item in the determination of a best firm.


Michael Burns, Catherine Latham, Jennifer Ciliberto, David Plant
Gave some background information on the presenters. Burns had previously been with Grant Thornton. They have experience dealing with foundations with extremely large endowments including the Archdiocese of Boston. Latham briefed the group as a corporate auditor in terms of Beacon Press’ operations. Tofias would utilize a two manager system with Latham dealing with BP and Ciliberto focusing on the remainder of the UUA. Plant also serves as principal with Harvard, MIT, and Yale University Press. A large focus of work will be on transparency which is really key with organizations that do not file taxes. Burns said they are clear that they work for the audit committee and with the management. There needs to be open communications between the Audit Committee members and the audit team. Tofias uses an inverse pyramid in their client interactions. We can expect to see partners on site frequently. Discussion regarding Tofias’s ongoing emphasis on not-for-profit business (versus those firms that emphasize SEC clients). Tofias has 28 partners; 6 are women, none are people of color. General impression was positive. They had some salient comments and good advice. They had good knowledge of the UUA already. Smith asked if we are hiring the people or the firm. There is some concern about their ability to pull in other areas of knowledge. Smith is concerned about what happens if the whole team is hit by a truck, who would handle the ongoing work.

Tonneson & Company

John McTiernan, Vincent Luccitelli
The group from Tonneson joined the committee to give their presentation: First point is to review their firm’s background and capabilities. Want to review the firm’s ability to provide advice in the not-for-profit arena. Want to be ahead of the curve, should more regulation come along. Emphasis on continuity; has strong staff retention. Outline of office: 75 people; 8 shareholders. Local to this area. Large involvement with various local Jewish groups. They feel that this is a close match for their skills. They really focus on the firms they are specializing in and will walk away from a firm which falls outside their area of expertise. They have dedicated staff to deal with not-for-profits. They will also thoroughly test for fraud and internal control processes. They throw in one or two free projects per year for their clients. Such projects may include a complete scrub of internal control features. They stressed that there would be involvement at all levels of Tonneson; three of the seven partners are here today. Saunders asked what intrigues them the most. Tonneson responded that that would be the endowment and the restricted assets. It is Tonneson’s role to provide alternatives to business practices (such as Financial Reporting format) that might better serve the UUA. Reece asked about the methodology to be used of communicating any issues outside the audit that may come up. There is a need to format the annual financial statements to make them look like monthly statements. Reece asked for some information on the makeup of the staff. Approximately 55% are female. One partner is female and most managers are female and approx. 50% of supervisors and staff are female.

Group reconvened. Merck led off the discussion to decide what the next step(s) should be. First of all, it needs to be determined whether the Audit Committee is empowered to select the auditors. The Audit Committee is authorized to recommend to the board the selection of an auditing firm. Smith said that the last group is solid. He said that their problem is that they were following someone who was very energetic and that they were the last group of the day. They absolutely know their business and they are very traditional yet risk taking. Smith said they are the only firm to define themselves geographically. Einhorn was struck by the fact that they stressed what they wouldn’t do. Merck said that Tonneson has some very respectable people. Einhorn feels they are solid.

Reece shared his compilation of ways to assess/rate/rank the alternatives:

1. Comprehensiveness of Services
2. Dimension/Reach/Capacity
3. Style/Chemistry
4. Fees
5. Communications/Relationship Building
6. Best Practices / Mgt/ Letter
7. Cultural Fit

Merck asked the UUA staff members present to share their views of the audit firms with the committee members. Rutherford feels that anyone can do the physical audit. She feels there are certain groups who could provide better one-on-one service and those tended to be the small groups. Obviously some were better at talking. She feels that some of them would be more fun to work with and we would be a bigger fish. Tofias is the best cultural fit. Rutherford feels that it is very important to get the references done. Tofias, Tonneson, and McGladrey are the top three. Rutherford feels that it would be neat to do a test (a two year commitment). Einhorn said that she feels that the firms are in this for the long run even though we may be looking at this as a test run. Her preferences for the auditors were Tofias, Tonneson, and then McGladrey, in that order. Charbonneau raised the point of ‘do we want someone who is such a close match’. Gabert believes the national footprint is important. KPMG is the best fit as one of the top four accounting firms with its name recognition and the appearance of the broader coverage that it gives. He would then say McGladrey and then either Tofias or Tonneson. Crowell feels that in terms of capacity, KPMG or McGladery would be best. Style wise, Tofias is number one for him because of the amount of face time work needed. Tofias with the reservation of being small and McGladrey or KPMG tied for second. Montgomery said that her main issue is to have a partner that they can have a close relationship with. Montgomery would go with Tofias with the understanding that they are a small firm and that the references would check out. Second choice would be KPMG. She can live with anything with the exception of Deloitte.

Reece asked if we want to engage Ladd in this conversation. He ranked the firms on his scale of 0 to 5 for each of the first six points listed above. D&T was ranked the lowest. McGladery and Tonneson were next lowest. Tofias was his first choice with KPMG second and Tonneson third. Acknowledging Gabert’s comments regarding national footprint, Reece really likes KPMG in terms of resources, resourcefulness, and footprint. Tofias and KPMG are tied with an edge towards Tofias for the multi-cultural workplace environment.

Saunders’ top two are Tofias and KPMG. The tension he feels between the two is footprint and resources versus cultural fit and alignment with UU values.

Smith is wrestling with the footprint issue. Our impressions of each firm are almost immaterial. It’s how we are perceived by the outside UU world. Big four firms won’t even do business with some firms so going with a big four gives us an endorsement of sorts. Also, if we go small now maybe we will not be able to go back to a big four in the future. Organization wise, KPMG is the clear choice. Tofias on the other hand is that Tofias is a clear winner in terms of cultural alignment with the UUA. He ranks the firms as KPMG then Tofias then McGladrey.

Merck feels that Tofias doesn’t serve as a negative but KPMG serves as a strong positive. Smith feels that this is a matter of packaging. Merck is leaning towards the polar argument between KPMG and Tofias. KPMG and footprint along with resources, depth of knowledge, depth in education and not-for-profit are impressive. He is also drawn to Montgomery’s desire for there to be a resource that Management can turn to and work with. He’s concerned that Mike Burns from Tofias serves his firm as more of a marketing resource than as an operational resource. Merck feels, however, that he would serve as a good resource to senior management. Merck’s rankings: Tofias, with KPMG a close second.

Einhorn questioned who really the users of our statements are and thus who we were serving. Saunders said that we should not look at this as a question of who we like best but more of what’s in the best interest of the Association in the long run. Merck said if you look at the two top firms you have to look at who has the best long term value. Smith asked is there a way to tap both firms.

The meeting adjourned at 4:15 p.m.