December 23, 2003 Response to Written Questions Request for Proposal Annual Audits of Financial Statements RFP No.: 2P200305 The following answers are in response to the written questions submitted by prospective Proposers regarding clarification of the intent and content of the RFP, or on the competitive proposal process. This document provides the written responses to all questions that were received in the CalSTRS office by December 15, 2003, 5:00 PM, PST. Clarification of the Intent and Content of RFP Q1. What do you like about the service provided by your current auditing firm? What don’t you like? A1. We liked the thoroughness of the 2003 audit work. However, we thought the auditors could have told us earlier what additional testing they required. The financial statements report was not issued until December 2003, passing the normal deadline of September 30, 2003. Q2. Are your prior year auditors included or excluded from the current RFP process? A2. Excluded. Q3. What were the audit fees for each of the last two years? A3. Fiscal year 2000-2001 audit fee - $90,836.00 Fiscal year 2001-2002 audit fee - $85,000.00 Note: The 2002-2003 audit base fee is $105,000 plus additional fees for additional testing, the total is not available at this time. Q4. Were there any major changes in the engagement requested in the RFP compared to last year’s engagement? A4 No major changes.. Q5. Have there been any disagreements with the predecessor auditors on matters of accounting or auditing standards? A5. No. Q6. Has the predecessor auditor been invited to submit a proposal? If not, why not? A6. No. CalSTRS limits an external audit firm to providing audit services for up to seven consecutive years. Q7. The auditors report on the 2002 financial statements referred to the work of other auditors of the Voluntary Investment Program. Is such a reference acceptable on an on-going basis? A7. Yes. Q8. Item 6e of the RFP indicates that proposals can be rejected if conditional. Since certain client acceptance procedures are required by generally accepted auditing standards that cannot be done prior to being appointed (principally inquiries of prior auditors), is satisfactory completion of client acceptance procedures excluded from the rejection criteria? A8. Yes. Item 6e is in reference to the submission of the proposal and does not intend to cover conditions that may be contained in actual agreement. Q9. Item 3n of Exhibit A indicates that the contractor will use its own computer services and, if an independent computer service center is used, contractor shall pay for such computer center costs. To what extent can the Teal Data Center be used in support of the audit without cost to the auditor for tasks such as: (1) to extract data for analysis by auditors or (2) process data analysis programs against STRS data? A9. The Teal Data Center stores CalSTRS database management information and does large batch processing. The access to Teal Data Center will be allowed but must be pre-approved by Audit Services and the cost will be supported by CalSTRS as long as it is reasonable in relation to the work required by the independent auditor to issue an opinion on the financial statements. All data extracted belong to CalSTRS. Q10. Item 3l of Exhibit A indicates that 3 to 6 meetings of up to 4 hours in duration each on various topics can be expected each year. How many such meetings were held during each of the prior few years and how much research and preparation is expected to be required for such meetings? A10. We had two closed meetings between the independent auditor and the board members this year. In addition, we had one entrance meeting and three interim meetings between the independent auditor and internal auditors on additional testing work. There may be an exit conference but there will be at least one more board meeting for the presentation of the financial statements and letter to management if they are combined. The intent of allowing time for meetings is to give CalSTRS staff to have access to the independent auditor for discussion of issues as they come up. Q11. Who is the principal author of the MD&A, financial statements and footnotes, CalSTRS or the auditor? A11. CalSTRS is the author and the auditor performs review. Q12. Is a SAS 70 internal control report available annually on State Street Bank in connection with its internal controls over custody of CalSTRS’s investment securities? If so, does it cover the July 1 to June period (vs another cutoff)? Has there been any qualifications in the SAS 70 report in the past? A12. Yes. Q13. The RFP indicates that no provisions of the agreement (Exhibit E) are subject to negotiation. With that in mind, we have some questions of clarification about the terms of the agreement: a. Confidentiality (item 10 on page 5 of 19 of Exhibit E) – Since auditors can be forced to produce working papers and provide testimony when presented with a supbeona (or other legal requirement), the question is whether that would be a material breach of the agreement, as defined in this section? b. Indemnity clause (item 9, page 9 of 19 of Exhibit E) – the question is whether the negligence portion of item (ii) of that section is “simple” negligence or “gross” negligence? c. Termination (section L of Exhibit E beginning on page 18 of 19) – This section provides that CalSTRS can terminate the agreement for any of several reasons, none of which we disagree with. However, professional auditing standards require that auditors withdraw from engagements under certain circumstances involving circumstances such as disagreements with clients over matters of accounting principle or auditing scope (and other causes). While no “withdrawal” situations are expected, it could be important to retain the right to do so. Such “right” to withdraw under those circumstances is a standard part of the letter of engagement traditionally issued by auditors. Elsewhere in the RFP it is acknowledged that a letter of engagement will be executed but it is indicated that the letter of engagement does not change the provisions of the agreement. In the combination of terms of the agreement and the letter of engagement, does the auditor have the right to withdraw under the circumstances where withdrawal is required by generally accepted auditing standards? A13. For a, if the independent auditor is required by law to provide confidential information, the independent auditor shall give CalSTRS reasonable notice to object (in the event there is a subpoena and we want to bring a motion to quash such subpoena). For b, the answer is Gross Negligence. For c, if withdrawal is required by generally accepted auditing standards, the auditor has the right to do so as long as it is communicated in advance with CalSTRS General Counsel and provides opportunity for remedial action. Q14. Exhibit G, contributions and gift disclosure – Are the disclosures required by Exhibit G contributions of the contractor entity or would they also include contributions made by its partners and/or employees? A14. Contractor will require its partners, principals, and managers assigned to the CalSTRS account to disclose, when assuming or leaving a position and on an annual basis, their personal economic interests. Q15. Actuarial assumptions – Are any actuarial assumptions in the June 2003 financial valuations going to be different from those used in the most recent prior valuations? If so, what will they be? A15. No. Q16. What is the reason for the minimum requirement to have audited at least two pension plans "with assets in excess of $5 billion"? Will firms who have significant pension plan experience but do not meet this criteria be considered? A16. The referenced Minimum Qualification specifically states, “The firm must have conducted, within the last five (5) years, at least two (2) audits of defined benefit pension plans with assets that exceeded five billion dollars ($5,000,000,000) at the time of audit. This requirement may be met with two years of auditing the same defined benefit pension plan of minimum size of $5 billion or two audits with total assets exceeding five billion dollars.” The second sentence allows that a firm can meet the requirement by one of two other ways- 1) two years auditing the same defined benefit pension plan of minimum size, OR 2) two audits (defined benefit pension plan) with total assets exceeding five billion dollars. Q17. Who was your previous auditor? A17. PricewaterhouseCoopers. Q18. Was your previous auditor invited to bid? A18. Please see the answer to Q6. Q19. How long have they been your auditors? A19. Since 1996. Q20. Have you been satisfied with their performance? A20. Yes. Q21. What were the fees for last year’s audit? A21. Please see answer to Q3. Q22. What is budgeted for this year's audit? A22. No specific amount has been budgeted.