AUDIT CONSIDERATIONS FOR IEA LOCALS
The IEA recommends that our locals strongly consider having some sort of a routine annual audit. An audit can have several benefits, including:
- Help to ensure compliance with basic bookkeeping and filing requirements.
- Help to ensure compliance with internal procedures, e.g. two signatures on checks.
- An audit makes it much more likely that any significant financial fraud is detected.
- An audit acts a deterrent to prevent fraud from occurring in the first place.
- An audit shows your members that the local leaders are concerned about safeguarding their funds.
- For locals that hire an outside auditor, an audit may bring to light any internal control deficiencies that should be corrected.
- An outside auditor may give you a “package price” for the audit and preparation of any required regulatory forms such as the 990-EZ.
It is possible that your local does not need an audit. If your local has no local dues and a membership of five or less, you probably don’t need one. Otherwise, you should consider having some sort of audit, even if it’s a one-person audit committee with a very limited scope.
The available options for audits are shown below. Look at this as a continuum where, as you move down the list, the thoroughness of the audit increases. At the same time, so does the cost. The challenge is to select the option that gives you an appropriate level of comfort, at the least cost.And please note that we are going to use the term “audit” (small “a”) to refer to any of the four services below, and the term “”Audit” (large “A”) to refer to one specific type of procedure performed by a Certified Public Accountant (CPA). We hope this doesn’t cause too much confusion.
Internal audit committee
Outside CPA “Agreed-Upon Procedures”
Outside CPA “Review”
Outside CPA “Audit”
An audit by a local committee can take many forms, from the simple to the sophisticated. Additional information is contained in Appendix A. If you decide to employ a CPA, Appendix B may be useful in helping you to decide which type of service is appropriate.
It is impossible to provide a set of black-and-white rules in terms of what type of audit service is appropriate for a given local. The IEA has more than 900 locals and all of them are different. While the size of a local is an important factor, it’s by no means the only one. It is easy to conceive of a local with 600 members that would be well served by an internal audit committee, and a local with 150 members that really needs an “Audit” by a CPA.
Here is a tool that may be useful. First, look at your local’s annual dues obligation, including IEA-NEA dues as well as your local dues. Then, get an idea of how “complex” your local is, based on the factors below. These are more or less ranked in order, from high importance to low.
Finally, based on your dues obligation and relative complexity, get an idea of where your local would appear on this chart:
In this model, the type of audit service that you need depends on which “zone” your local falls into (Green, Orange or Red), and where it falls within each zone.
“Green Zone” locals can probably get by with an internal audit committee. The closer you are to the top right corner of the Green Zone, the better and more sophisticated this committee needs to be.
Locals near the bottom left corner of one of the “Orange Zones” may be able to get by with a good internal committee. The rest should consider having a CPA perform “Agreed-Upon Procedures” or a “Review.”
Locals near the bottom left corner of the “Red Zone” may be able to get by with “Agreed-Upon Procedures” or a “Review.” As you approach the top right corner, an “Audit” becomes your best option.
We realize this is still fairly subjective, but we hope it clarifies the factors that should be considered. Some judgment is always going to be required. If the chart indicates that you would be OK with one type of service, but you aren’t comfortable with that, move on up to the next level. And if you are unsure of which of two services are appropriate, choose the higher-level one.
Some locals try to save money by paying for a CPA to perform an “Audit” once every two or three years. This may be OK in some cases, as long as there is appropriate coverage in the other years. For example, a local in the lower left corner of the “Red Zone” may choose to have a “Review” in Years 1 and 2, and an “Audit” in Year 3. This would probably be all right. It would not be appropriate for this local to have an “Audit” every three years and have little or no audit coverage the other two years.
If you are in the market for a CPA and would like assistance, your UniServ Director might be able to get you in touch with other locals that already use a CPA. Or you can contact the IEA Director of Business Services.
As a final thought, it is important for you to remember that none of the audit services that we have discussed is going to give you absolute assurance that all fraud or material errors will be detected. An audit is only one element of a good “internal control” system. Failure to recognize this can provide a false sense of security. In addition to having an annual audit, it is important to make sure that you have a good set of other controls in place as well. For further information on this, consult the Financial Procedures for Locals & Regions manual, or contact the IEA Director of Business Services.
APPENDIX A: INTERNAL AUDIT COMMITTEES
Smaller, less complex locals should establish an Audit Committee to perform an internal review at least once a year. The Audit Committee should not include the treasurer or any other individual who is responsible for bookkeeping, handling cash, etc.
Since it is considered a "best practice" to include someone on your committee who a)has financial expertise, and b) is not a member of your local, the treasurer for a nearby local or region might be a good resource to your Audit Committee.
The Audit Committee should base its work on a list of audit procedures that is agreed upon by the governing body before the review takes place. This will ensure that the Committee performs the job that is expected of it and eliminates the need for “reinventing the wheel” every time a review is performed. See Appendix 1 in the Financial Procedures for Locals & Regions manual for an example. This checklist also serves as a concise description of what a good bookkeeping and internal control system looks likes.
Appendix 1 should be looked at as a “menu” from which you pick the actual audit procedures to be performed by your Committee. . Since every organization is different, you want to pick a reasonable number of procedures to be performed, and choose ones that seem most important. You can also consider changing the procedures every year, to ensure better coverage of your finances and maintain the element of “surprise.”
Most audits will include a review of payments made during the year to verify that expenditures were made for properly approved purposes. Each payment should be checked for the proper authorization signature(s) and for adequate supporting documentation that clearly indicates what the payment represents. The Audit Committee should also examine bank reconciliations, bookkeeping records and procedures, and all other financially-related areas.
Having said that, a less-comprehensive audit is better than no audit at all. So you may want to “start small” with an audit that just includes a few items, then keep adding to the checklist every year.
Upon completion of the internal audit, the Committee should file a written report to be reviewed by the governing body and included with the permanent records. Here is an example:
TO: ______President
______Education Association
We have performed the procedures enumerated in the checklist for review of financial records. Based upon this review, we have satisfied ourselves that the Association’s (Region’s) cash basis transactions for the twelvemonth period ending ______, 20__, are accurately and recorded in the books and records, are adequately documented, and were for authorized purposes.
______
Audit Committee Chair
______
Date
APPENDIX B: OUTSIDE CPA SERVICES
The types of services that a CPA can provide for you are strictly regulated by the accounting profession. The CPA is required to abide by certain standards that apply to each type of service. For this reason, they may not be as flexible as you might expect in terms of what they do for you or how they go about their work. In all cases, you will have to sign a document that spells out the services that will be provided and what responsibilities the CPA is taking on. This is for your mutual protection and is a good thing for you, as long as you understand what you are signing.
In addition to the following, a CPA can provide what is known as a “Compilation,” but this just involves creating a financial statement out of your raw accounting data. The CPA takes no responsibility other than creating the statement. So this type of engagement may be useful to you, but it really doesn’t fall under the category of “audit services.”
In an “Agreed-Upon Procedures” engagement, you basically tell the CPA what you want him/her to do. They will take responsibility only for doing what you tell them. For example, you might tell them to review all of your payments for the year to make sure that they are properly documented per IRS guidelines and your own requirements. Or you could tell them to make sure that your local collected all of the member dues that it was entitled to.
When performing a “Review,” the CPA will perform a set of procedures that will enable him/her to provide “limited assurance” that your financial records are OK. The CPA’s report will not say that your financial records are correct; it will say that the CPA is not aware of any material problems with your records.
In an “Audit” engagement, the CPA is required to perform enough work to determine that there are no material problems with your financial records. The extra work required for this type of engagement, plus the additional responsibility that the auditor takes on, can mean a significantly higher price than they would charge for a “Review.”
If you consider using a CPA, you should sit down with the candidates, tell them what you are looking for, and talk about how they would approach each of the above services. In particular, you should be aware that some of the internal procedures that you consider to be important might not be tested by the CPA unless you specifically tell him/her to do so. For example, it may be important for you that all payments over $100 be approved in advance by your Board. This is not something that would normally be tested in an “Audit” or a “Review” unless you make it part of the engagement.