The Importance of Hiring Members of Management with Skills, Knowledge, and Experience
External auditors help assure that your organization’s financial statements are accurate, fairly presented, and free from fraud, but they can do so much more than that. For example, if your organization needs help with bookkeeping, tax preparation, or some other non-attest service, your auditors may be able to step in without jeopardizing independence doctrines.
Your auditors can provide certain non-attest services to maintain independence as long as your management team has the skills, knowledge, and experience to oversee those services.
Why Having Skills, Knowledge, and Experience is Important
It is (and always will be) management’s responsibility to present accurate financial statements, but this doesn’t mean members of management have to be the ones preparing the financial statements. For example, the business may hire a third-party bookkeeper to record journal entries or contract with another entity to perform monthly reconciliations. Using a third party does not – by default – threaten the accuracy of the financials. If the third-party contractors are competent to perform those services and management is knowledgeable enough to oversee them, there shouldn’t be an issue.
This same concept is applied when your external auditors perform non-attest services for your organization. For example, it is not uncommon for small nonprofits and government entities to struggle to prepare their financial statements in accordance with generally accepted accounting principles (GAAP). Auditors, who tend to be experts in GAAP reporting, can adjust the presentation of your financials and draft the required disclosures to align with GAAP. As long as one of your team members has the Skills, Knowledge, and/or Experience (SKE) to oversee their work, independence shouldn’t be compromised for the annual audit.
What Your Auditors Will be Looking For
When auditing your financial statements, your auditors will follow Generally Accepted Auditing Standards (GAAS). Under GAAS, your auditors are required to verify that someone with SKE is overseeing certain non-attest services they fulfill for your organization. This person does not need to be able to reperform the service, but they need to understand enough about the service to know that your auditors perform it proficiently.
But how can you prove to your auditors that your management team or representative has SKE?
The test for sufficient SKE is subjective, but your auditors will want to know if your chosen representative has the knowledge of your organization’s operations, its industry, and of the non-attest service being performed. This means that they might look at your representatives:
- Level of education
- Position in your organization
- Tenure at your organization
- Experience at similar organizations
- Recent training
Be upfront with your auditors about your representative’s background, knowledge, training, and experience. Your auditors must document SKE findings, so provide them with as much proof of SKE that you can.
Who Should Have the Skills, Knowledge, and Experience
The person in your organization overseeing your auditor’s non-attest services can be just about anyone. In a small organization, it could be the owner or the CFO. In a larger organization, it could be a senior officer or the controller. The person with the SKE may not even need to be an employee. You may be able to hire an independent consultant to oversee the services. What’s important is that the person leading the non-attest service has SKE over that service.
In our previous example, where the non-attest service being performed is transcribing non-GAAP reports into GAAP-compliant reports, your representative should have SKE over financial reporting. If your organization’s CEO has no real financial background or training in financial reporting, they would not be the best person to oversee the auditor’s tasks.
If you are struggling to find someone in your organization with sufficient SKE, you may be able to provide one of your employees with training so that they can acquire SKE. For example, suppose your CFO understands financial reporting but is less familiar with GAAP standards. In that case, you could send them to a training course on GAAP, so they are knowledgeable enough to oversee your auditor’s tasks. A board member could also be the individual with SKE if they have an accounting or financial background and are willing to take on that responsibility.
Independence is Non-Negotiable
If your management team lacks SKE and is unwilling to gain knowledge to obtain SKE, there is nothing you can do to remedy the problem. Without SKE, there is no independence. If you want your auditors to perform non-attest services for your organization, SKE should be a chief concern.
Contact Us
If you have questions about the information outlined above, would like to discuss SKE with one of our auditors, or want to learn more about non-attest services we can perform alongside the annual audit, please click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.