FACTS: As the ASNG (AS Natural Gas) Audit Committee Chair, I am charged with reviewing four bids submitted by four CPA firms to perform ASNG's first financial statement audit. BACKGROUND: Based on our class discussion what factors would you use to choose a CPA firm for the annual audit of ASNG's financial statements? Use the guidance provided by SAS 114 or AU Section 380. The Potential Client: AS Nasty Gas (ASNG) is a natural gas distribution company located in AnyMetro Area, AS. It is a wholly owned subsidiary of Big Energy Company, a diversified public traded company located in Sate Capital, AS. Before the current year, ASNG did not produce its own financial statements. Instead its financial statements were consolidated into those of Big Energy. However, now ASNG wishes to issue its own debt and so must issue its own financial statements. Hence, ASNG is interviewing several audit firms to conduct the first ever annual audit of ASNG' financial statements. ASNG has $750,000,000 in annual revenue and net income of $50,000,000. It has 400,000 customers. Formally, ASNG was an operating division of Very Expensive Electric Company and was formed into its own company five years ago. A natural gas distribution company is regulated by the State Corporation Commission. However, natural gas is not regulated at the well head. It is regulated at the transmission line. ASNG has its own officers and a board of directors composed of the Chair of the Board of Big Energy Company, The CEO and CFO of ASNG, and five outside directors (mostly local business people). The five outside directors are considered independent directors and financially competent for SOX purposes. The audit committee is composed of three of these outside directors. The audit committee meets regularly four times a year. ASNG's CEO, CFO and Internal Auditor all attend the audit committee meetings. The Directors meet separately and alone with the Chief Audit Executive at the end of each meeting. The Audit Firms and Their Offers: Waterhouse ArthurLybrand (WAL)- A Big Four Firm that does the annual audit of Big Energy Company. Initially, they assumed they would do the annual audit of ASNG. They told the ASNG CFO that they would be happy to do the ASNG Audit for $50,000. Now faced with competition, WAL has put in a bid of $35,000. Their bid for extra work includes a Partner Rate of $300, a Manager Rate of $200, and a staff rate of $100. WAL has an impressive list of clients in the public utility sector but not many natural gas distribution companies. ToucheDelloite (TD) - A Big Four Firm that has an impressive list of natural gas distribution clients. TD have put in a bid of $50,000. Their bid for extra work includes a Partner Rate of $350, a Manager Rate of $250, and a staff rate of $100. Arthur Whinney (AW) - A Big Four Firm that has an impressive list of Fortune 500 clients including diversified energy companies like Big Energy. AW have put in a bid of $75,000. Their bid for extra work included a Partner Rate of $400, a Manager Rate of $300, and a staff rate of $200. Lincoln, Grant, Sherman and Sheridan (LGSS) - A large regional firm, primarily located in the South has an impressive list of publicly traded clients primarily in the banking sector. The firm entered the Tidewater area by purchasing a very successful old local firm. The partners from this firm have many contacts in the community and especially the local banking community. They put in a bid of $30,000 with extra work proposed at a Partner Rate of $200, a Manager Rate of $150, and a Staff Rate of $75. Some important issues to cover: Corporate Governance as opposed to Management The role of the Board of Directors The role of the Audit Committee of the Board of Directors The Blue Ribbon Commission on Audit Committees SOX Requirements of Audit Committees Who should hire the company's CPA firm? What factors would you use to choose a CPA firm? What issues should be covered in the engagement letter? What communications should take place between predecessor and successor auditors? What issues should be discussed between the CPA firm and its clients audit committee? Any additional issues