State
of New Jersey
Executive
Order #122
Governor
James E. McGreevey
WHEREAS, public authorities, agencies and commissions ("authorities")
of the State of New Jersey oversee billions of dollars in public funds;
and
WHEREAS, the independent auditing process is fundamental to the ability
of those state authorities to oversee the public funds, to set appropriate
financial policies, to ensure that management maintains effective internal
controls and to ensure that financial statements are free from material
misstatements; and
WHEREAS, boards of directors, management, internal auditors, and independent
auditors each have an important role in the authorities' financial reporting
and audit processes; and
WHEREAS, management is responsible for the financial reporting process
and internal controls; and
WHEREAS, internal auditors are responsible for assessing whether internal
controls established by management are functioning and effective; and
WHEREAS, independent auditors are responsible for publicly attesting
to the fairness of financial statements, evaluating the effectiveness
of internal controls and, through the issuance of management letters,
making comments and recommendations which, when implemented, may improve
the design or operation of internal control systems; and
WHEREAS, an audit committee is a fundamental component of an effective
financial reporting and audit process, responsible for overseeing the
other participants in the process, for proactively ensuring the quality
and integrity of the authority's financial reports, and for reporting
any audit findings and recommendations to the board of directors for appropriate
corrective action; and
WHEREAS, as Governor, I have a responsibility to manage the operations
of State government and its various authorities efficiently and effectively
to secure public confidence;
NOW, THEREFORE, I, JAMES E. MCGREEVEY, Governor of the State of New
Jersey, by virtue of the authority vested in me by the Constitution and
by the Statutes of this State, do hereby ORDER and DIRECT:
- For the purpose of this Order, "audit" shall mean an examination
of the financial statements of each Authority by a certified public accounting
firm in compliance with the generally accepted government auditing standards
(GAGAS), issued by the Comptroller General of the United States, as may
be periodically revised, and in accordance with all applicable federal
rules, regulations, and circulars. Furthermore, for purposes of this Order,
"Board of Directors" or "Board" shall mean the governing body of an Authority,
and "relative" shall mean a person's spouse, child, parent or sibling
residing in the same household or a person's domestic partner as defined
in P.L. 2003, c.246 (N.J.S.A. 26:8A-3).
- The Board of Directors of each Authority shall create an Audit Committee
of no less than three members to assist in the oversight of the financial
reporting and audit processes of the Authority. At least two of the members
shall be members of the Board. At no time shall a member of the Authority's
staff be a member of the Audit Committee.
- Each of the members of the Audit Committee shall be independent of
the Authority. Independence of a member is satisfied only under the following
circumstances:
- the member has no financial relationship with the Authority, nor
is the member a partner, shareholder or officer of an organization that
has a financial relationship with the Authority;
- neither the member nor any member's relative is an employee of the
Authority;
- neither the member nor any member's relative is currently employed
by, or has in the past three years been affiliated with or employed
by, a present or former auditor of the Authority;
- neither the member nor any member's relative receives or has received
in any of the past three years direct or indirect compensation from
the Authority for consulting, legal or financial services, regardless
of the amount received and regardless of whether it is or was paid to
the member or to a firm with which the member or any member's relative
was associated; and
- the member is in compliance with all standards regarding independence
of auditors as may appear in GAGAS or may be established by the United
States General Accounting Office.
- At least one of the Audit Committee members shall have accounting
or related financial expertise. All of the members should have knowledge
of the Authority's governmental functions, and sufficient time to accomplish
the responsibilities of the Audit Committee. In the event the Board does
not have sufficient members qualified or available to serve on the Audit
Committee, or wishes to broaden the expertise on the Audit Committee,
the Board may request that the State Treasurer recommend one or more qualified
individuals to sit on the Committee.
- The Audit Committee shall assist the Board in retaining an independent
auditor to conduct an audit of the Authority's financial statements by
making a recommendation to the Board after engaging in an auditor selection
process described below. The auditor selection process shall be based
upon public, competitive bidding principles and shall take place no less
than once every five years. The Board shall award the contract based upon
the Authority's governing statute and regulations.
- In order to ensure the independence of the auditor selection process,
the Audit Committee shall adhere to the following procedures when making
a recommendation to the Board to award a contract to an auditor:
- An evaluation committee shall be established by the Board to conduct
the solicitation and evaluation of eligible auditors. The evaluation committee
shall consist of no less than three Board members.
- The evaluation committee shall be responsible for drafting requests
for proposals (RFPs), soliciting responses to such RFPs, accepting and
evaluating proposals, and providing a final written report to the Audit
Committee. The evaluation committee may draw upon the expertise of the
Division of Purchase and Property to assist it in the drafting of the
RFP, soliciting responses to the RFPs, and evaluating proposals. The role
of staff of the Authority shall be limited to providing assistance with
the RFP design.
- The evaluation committee shall review all responses to RFPs for responsiveness
and responsibility and shall evaluate such responses pursuant to criteria
established by the Audit Committee, as described below, and shall rank
the responses with respect to such criteria. The evaluation committee
shall prepare a written report of such evaluation and shall forward the
report to the Audit Committee.
- Prior to the solicitation of the engagement of any auditor, the Audit
Committee shall establish criteria for the selection of an auditor and
may weigh the criteria established. The weighted criteria shall be used
by the evaluation committee during the evaluation of proposals. In developing
the criteria to be used by the evaluation committee, the Audit Committee
shall include the following:
- proposed fee for services;
- quality of response to RFP package;
- demonstrated ability and qualifica-tions to conduct governmental
audits;
- quality of relevant service to the governmental entities in previous
transactions; an
- familiarity with federal laws, rules and regulations relevant to
govern-mental audits.
- Upon receipt of the evaluation committee's report, the Audit Committee
shall review the report and determine whether to re-rank the responses
based upon interviews. In such event, the Audit Committee shall interview
the firms responding to the RFP and rank the candidates after such interviews
based upon the established evaluation criteria.
- The Audit Committee shall make a recommendation to the Board for
award of an audit contract.
- The Board of Directors shall review the recommendation and make an
award to a firm.
- The Audit Committee shall also issue a report to the State Treasurer
within six months of making the recommendation to the Board that sets
forth the steps taken to comply with these procedures for selection of
an auditor.
- The auditor selected shall report directly to the Audit Committee
or the Board. At no time shall the auditor report to any staff member
of the Authority.
- At least twice each year, the Audit Committee shall hold a private
meeting with the auditor. One of these meetings shall be held prior
to commencement of the audit and the other upon issuance of the final
audit report. If the Authority also has an internal auditor, the internal
auditor shall meet with, and report to, the Audit Committee at least
once a year. Additional meetings shall be held upon the request of an
Audit Committee member, a Board member, or the auditor, and may include
such staff members as the Audit Committee or Board determines necessary.
- In carrying out its duties, the Audit Committee shall proactively
assist the Board in overseeing: (i) the integrity and quality of the Authority's
financial statements; (ii) the Authority's compliance with legal, regulatory,
and ethical requirements; (iii) the auditor's performance and ability
to perform; and (iv) the performance of the Authority's own internal audit
and internal control functions. In addition, the Audit Committee shall:
- review and evaluate audit fees;
- where the Committee believes that the auditor's performance is not
adequate in quality or independence, recommend such steps as may be necessary
to elicit appropriate performance, including replacement of the auditor;
- review the annual management letter with the independent auditor;
- review and approve all engagements of the auditor with the Authority,
including non-audit engagements, giving specific consideration to their
effect on the independence of the auditor;
- at least once every three years, obtain and review a report of the
independent auditor describing for the preceding year: (1) the independent
auditor's internal quality control procedures; (2) any material issues
raised by the most recent internal quality control peer review, or by
reviews conducted by governmental or professional authorities; and (3)
steps taken by the auditor to address such issues;
- regularly review with the independent auditor any audit problems,
any risks of material statements due to fraud, difficulties with management's
response (including restrictions or attempts to restrict the auditor's
activities, restrictions on access to information, and significant disagreements
with management) and responsibilities, budget and staffing of the Authority's
internal audit and control functions;
- review the audited financial statements and interim statements and
discuss them with management and internal auditors. These discussions
should include a review of particularly sensitive accounting estimates,
reserves and accruals, judgmental areas, audit adjustments (recorded or
not) and other such matters as the Audit Committee or independent auditor
shall deem appropriate;
- review internal control functions such as the planned scope of internal
audit reviews; adequacy of staffing; actions to be taken as a result of
internal audit findings; the adequacy of compliance with the Authority's
Code of Ethics; the effectiveness of electronic data processing procedures
and controls and related security programs; and
- recommend policies with respect to risk assessment and risk management.
- This Order shall apply to all State authorities, commissions, boards,
and councils that utilize external auditors to assist them in overseeing
public funds.
- This Order shall take effect immediately, and shall supersede Executive
Order No. 26 (Whitman) to the extent that the provisions of that Order
governing the selection of accountants are inconsistent with this Order.
GIVEN, under my hand and seal this 23rd day
of July in the Year of Our Lord, Two Thousand
and Four, and of the Independence of the United
States, the Two Hundred and Twenty-Ninth.
/s/ James E. McGreevey
Governor
[seal]
Attest:
/s/ Michael R. DeCotiis
Chief Counsel to the Governor
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