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April 29, 1988

MEMORANDUM FOR AUDIT AND REVIEW COMMITTEE

Soon Jim Hobbins will set up, at a time convenient to you, a meeting in executive session at which we can discuss the recommendation we should make to the Regents regarding rotation of the independent auditor. That will be the only agenda item and I will try to keep the meeting under one hour and a half. 

In order to help to focus the discussion, this paper is circulated ahead of time. You will recall that for the last meeting a paper was prepared showing the practice of representative non-profit and public bodies regarding retention and change of auditors. It shows that in the museum and university worlds rotation has not been practiced, whereas it is practiced in some municipal entities. 

The next meeting should address the options, which appear to be:

1. No change in policy.

2. Periodic competition not excluding incumbent.

3. Periodic competition excluding incumbent.

For myself, I can see the value in throwing auditor selection open from time to time, at least where a quasi-public entity is concerned, even though the practice is not supported by corporate or non-profit experience. It seems to be the ground rules should be those that:

-afford the audit committee a lot of flexibility;
 
-minimize the waste of experience and good performance on the part of the auditor;

-establish criteria that, so far so possible, will lead to the right selection and a good auditor performance and relationship.

With these considerations in mind, my own thinking leans toward option 2. In that option there is opportunity for change, but also built-in incentive to the auditor to take pains and do an outstanding job, which I fear would be much reduced under option 3. A ten year interval would seem reasonable. The mechanism probably should be a request for proposals (RFP), with a response time sufficiently long so as not to burden unduly firms not familiar with Smithsonian accounting matters.