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Audit Committees: Providing Oversight in Challenging Times Assurance and Advisory Business Services Audit Committees: Providing Oversight in Challenging.

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Presentation on theme: "Audit Committees: Providing Oversight in Challenging Times Assurance and Advisory Business Services Audit Committees: Providing Oversight in Challenging."— Presentation transcript:

1 Audit Committees: Providing Oversight in Challenging Times Assurance and Advisory Business Services Audit Committees: Providing Oversight in Challenging Times 1

2 2 Overview Enrons collapse has created a crisis of confidence in financial reporting Plenty of blame to go around Current debate on possible solutions includes those aimed at audit firms and audit committees Our presentation summarizes current issues and best practices relating to audit committees Enrons collapse has created a crisis of confidence in financial reporting Plenty of blame to go around Current debate on possible solutions includes those aimed at audit firms and audit committees Our presentation summarizes current issues and best practices relating to audit committees

3 Audit Committees: Providing Oversight in Challenging Times 3 CPA Professions Views Little need for changes in audit committee guidance Room for improvements in implementation Little need for changes in audit committee guidance Room for improvements in implementation

4 Audit Committees: Providing Oversight in Challenging Times 4 Responses to Calls for Change Financial community efforts Blue Ribbon Committee Blue Ribbon Commission Panel on Audit Effectiveness Independence Standards Board Regulatory and profession responses SEC, securities exchanges, and ASB rules in response to BRC Recent frauds, restatements, etc. Financial community efforts Blue Ribbon Committee Blue Ribbon Commission Panel on Audit Effectiveness Independence Standards Board Regulatory and profession responses SEC, securities exchanges, and ASB rules in response to BRC Recent frauds, restatements, etc.

5 Audit Committees: Providing Oversight in Challenging Times 5 Roles and Responsibilities Management – financial reporting and internal control Internal audit – assess internal control Independent audit – attest to fairness of financial statements Committee – oversight of the process and participants Management – financial reporting and internal control Internal audit – assess internal control Independent audit – attest to fairness of financial statements Committee – oversight of the process and participants

6 Audit Committees: Providing Oversight in Challenging Times 6 Reporting and Disclosure Audit Committee Report Proxy Disclosures Identify Committee members Number of meetings held Describe functions Consideration of nonaudit services Existence of charter Nonindependent directors Audit Committee Report Proxy Disclosures Identify Committee members Number of meetings held Describe functions Consideration of nonaudit services Existence of charter Nonindependent directors

7 Audit Committees: Providing Oversight in Challenging Times 7 Understanding the Business Knowledge of the Company Structure Financial reporting process Sophisticated or complex transactions Current environment Regulatory requirements Suppliers and customers Use of technology Knowledge of the Company Structure Financial reporting process Sophisticated or complex transactions Current environment Regulatory requirements Suppliers and customers Use of technology

8 Audit Committees: Providing Oversight in Challenging Times 8 Understanding the Business Internal Control Control environment Code of conduct System of internal control Internal Control Control environment Code of conduct System of internal control

9 Audit Committees: Providing Oversight in Challenging Times 9 Understanding the Business Risk of Fraud Earnings management issues Aggressive accounting policies Consider restructuring charges, R&D costs, subjective estimates, and premature recognition of revenue Risk of Fraud Earnings management issues Aggressive accounting policies Consider restructuring charges, R&D costs, subjective estimates, and premature recognition of revenue

10 Audit Committees: Providing Oversight in Challenging Times 10 Understanding the Business Legal and Ethical Matters Enterprise Risk Issues Emerging Issues Legal and Ethical Matters Enterprise Risk Issues Emerging Issues

11 Audit Committees: Providing Oversight in Challenging Times 11 Oversight of the Financial Reporting Process Need to understand: Financial results Adequacy and completeness of MD&A Significant changes or trends Critical accounting policies Significant issues, related party transactions, and accounting and auditing matters Unadjusted audit differences Need to understand: Financial results Adequacy and completeness of MD&A Significant changes or trends Critical accounting policies Significant issues, related party transactions, and accounting and auditing matters Unadjusted audit differences

12 Audit Committees: Providing Oversight in Challenging Times 12 Interim Financial Reporting Interim periods generally include more estimates and judgments than annual financial statements Discussions with management and auditors may be via conference calls, meetings, or both Interim periods generally include more estimates and judgments than annual financial statements Discussions with management and auditors may be via conference calls, meetings, or both

13 Audit Committees: Providing Oversight in Challenging Times 13 Oversight of Audit Function Audit process Audit resources Quality, experience, and staffing of internal auditors Qualifications and performance of independent auditors Scope and fees Non-audit services Audit process Audit resources Quality, experience, and staffing of internal auditors Qualifications and performance of independent auditors Scope and fees Non-audit services

14 Audit Committees: Providing Oversight in Challenging Times 14 Audit Committee Communications Discussions with independent auditors Audit planning and results Results of timely interim reviews Required communications Other meetings Discussions with independent auditors Audit planning and results Results of timely interim reviews Required communications Other meetings

15 Audit Committees: Providing Oversight in Challenging Times 15 Other Characteristics of Audit Committees Audit Committee Charter Indicates responsibilities, including receipt of disclosures from auditor on independence States that independent auditors are ultimately accountable to Board and Committee Audit Committee Charter Indicates responsibilities, including receipt of disclosures from auditor on independence States that independent auditors are ultimately accountable to Board and Committee

16 Audit Committees: Providing Oversight in Challenging Times 16 Other Characteristics of Audit Committees Financially literate, independent members Diverse backgrounds of members Typically 3-6 members Qualified, experienced Chair Terms of members Structuring effective meetings Financially literate, independent members Diverse backgrounds of members Typically 3-6 members Qualified, experienced Chair Terms of members Structuring effective meetings

17 Audit Committees: Providing Oversight in Challenging Times 17 Other Characteristics of Audit Committees Orientation and continuing education Provide background information to new members Obtain information on new accounting or auditing standards, financial reporting process, and significant issues affecting the Company Orientation and continuing education Provide background information to new members Obtain information on new accounting or auditing standards, financial reporting process, and significant issues affecting the Company

18 Audit Committees: Providing Oversight in Challenging Times 18 Best Practices Ask questions of the internal and independent auditors about the Companys system of internal control Establish clear expectations with management and auditors about the Committees qualitative information needs about internal control especially controls in higher-risk areas Ask questions of the internal and independent auditors about the Companys system of internal control Establish clear expectations with management and auditors about the Committees qualitative information needs about internal control especially controls in higher-risk areas

19 Audit Committees: Providing Oversight in Challenging Times 19 Best Practices Ask detailed questions of management and the auditors when reviewing the financial statements Interim discussions occur prior to the earnings release and cover significant matters Ask detailed questions of management and the auditors when reviewing the financial statements Interim discussions occur prior to the earnings release and cover significant matters

20 Audit Committees: Providing Oversight in Challenging Times 20 Best Practices Consider the presence of risk factors for potential fraudulent financial reporting Understand why management did not correct audit differences and what the effect would be on the financial statements if such differences were corrected in the current period Consider the presence of risk factors for potential fraudulent financial reporting Understand why management did not correct audit differences and what the effect would be on the financial statements if such differences were corrected in the current period

21 Audit Committees: Providing Oversight in Challenging Times 21 Best Practices Develop a meeting planner to make sure that the Committee meets its responsibilities outlined in the Charter Add a disclosure to proxy that references the Audit Committee Report and Audit Committee Charter for detailed information Perform a self-assessment of the Committee to identify areas for improvement Develop a meeting planner to make sure that the Committee meets its responsibilities outlined in the Charter Add a disclosure to proxy that references the Audit Committee Report and Audit Committee Charter for detailed information Perform a self-assessment of the Committee to identify areas for improvement

22 Audit Committees: Providing Oversight in Challenging Times 22 Legislation and Regulation Status On July 24, agreement was reached by Congress on a compromise corporate crime bill The SEC has been very active` On June 27 issued an order requiring the CEO and CFO of 1000 companies to certify their most recent filings On June 17 proposed a permanent certification requirement proposed changes in financial disclosure rules earlier this year proposed new rules creating an accounting oversight board on June 26 intends to propose changes in auditor independence and corporate governance rules later this summer On June 6, the NYSE published a working draft of proposed corporate governance listing requirements On July 24, agreement was reached by Congress on a compromise corporate crime bill The SEC has been very active` On June 27 issued an order requiring the CEO and CFO of 1000 companies to certify their most recent filings On June 17 proposed a permanent certification requirement proposed changes in financial disclosure rules earlier this year proposed new rules creating an accounting oversight board on June 26 intends to propose changes in auditor independence and corporate governance rules later this summer On June 6, the NYSE published a working draft of proposed corporate governance listing requirements

23 Audit Committees: Providing Oversight in Challenging Times 23 Among The Issues Being Debated Corporate Governance: Increased responsibilities for corporate officers, boards of directors, and audit committees Accounting Profession Reform: The power and composition of a new auditor oversight board and the scope of services that may be provided to audit clients Financial Disclosures: Proposals intended to enhance corporate transparency and require real- time disclosure of important financial information Corporate Governance: Increased responsibilities for corporate officers, boards of directors, and audit committees Accounting Profession Reform: The power and composition of a new auditor oversight board and the scope of services that may be provided to audit clients Financial Disclosures: Proposals intended to enhance corporate transparency and require real- time disclosure of important financial information

24 Audit Committees: Providing Oversight in Challenging Times 24 Corporate Governance Reform HouseSenateSECNYSE Certification of Financial Reports N/ACEO/CFO must certify that financial statements and disclosures fairly represent the companys financial condition CEOs and CFOs must certify that financial reports include all information of which they are aware that is important to a reasonable investor CEO must certify that the financial reports are accurate and complete in all material respects Audit Committee Composition N/AAudit committee members must be independent from management N/AProposed independence requirements for audit committee members and financial expertise requirement for the Committee chair DisgorgementGives SEC authority to require disgorgement of bonuses, stock profits or other incentive pay if misconduct results in accounting corrections Same as House billCurrently using enforcement actions to seek disgorgement N/A Ban on Officers/Directors Gives the SEC administrative authority to bar substantially unfit corporate officers Gives the SEC authority to seek court orders banning unfit corporate officers and directors Using court system to to seek orders banning substantially unfit corporate officers and directors N/A Shareholder Approval of Stock Options N/A Requires shareholder approval of equity compensation plans

25 Audit Committees: Providing Oversight in Challenging Times 25 Accounting Profession Reform HouseSenateSECNYSE Regulatory Board CompositionFive members, two of whom must be CPAs, and two additional who may be CPAs Five members, two, and only two, may be CPAs Nine members, a minimum of six of whom must be public members. Maximum of three CPAs N/A PowersDisciplinary and investigative powers, but no standard setting powers The Board would set audit, quality control, ethics, and independence standards, or could approve standards set by a professional group Set standards or rely on private sector groups with oversight N/A Scope of Services Prohibited Services Directs SEC to bar the provision of IT consulting and internal audit services to audit clients Statutorily bars services already restricted under SEC rule, with additional prohibition of IT, internal audit, and expert services N/A Audit Committee Approval No provision (defeated in committee 31-19) All non-audit services are deemed unlawful unless pre- approved by audit committee Audit committees would pre- approve non-audit services Similar to SEC, except audit committee approval limited to significant non-audit engagements

26 Audit Committees: Providing Oversight in Challenging Times 26 Financial Disclosure Reform HouseSenateSECNYSE Real Time Disclosures Accelerated Filing Deadlines N/A Proposed accelerating filing deadlines of annual reports from 90 to 60 days after close of fiscal year, and quarterly reports from 45 to 30 days after the end of the quarter N/A Insider Transaction Disclosure SEC directed to adopt rules Requires accelerated reporting of insider transactions and loans Proposed rulemaking that would require companies to report insider transactions, including loans, within 1-10 days N/A Expansion of Information Reported SEC directed to conduct an analysis of need for rulemaking Requires an audit of managements assessment of internal controls and also requires auditors to test and report on compliance with certain laws and regulations Proposed requiring more frequent 8-K disclosures (filed when listed events occur between annual reports and quarterly reports that would be of significance to investors) N/A Improved Transparency Critical Accounting Procedures SEC directed to conduct an analysis of need for rulemaking N/AProposed rulemaking requiring disclosure of critical accounting procedures in annual and quarterly reports. Soliciting comments on disclosures when a companys accounting policies diverge from those used by other industry members. N/A Pro Forma EarningsN/ACompanies must reconcile pro forma information with GAAP and not omit information that makes it misleading Issued cautionary advice on appropriate use of pro forma financials in earnings press releases N/A Off Balance Sheet Transactions SEC directed to adopt rules Issued cautionary advice regarding need to disclose in 2001 financial reports N/A


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