Financial Expert Person with the following attributes: –understanding of financial statements and GAAP; –ability to assess application of such principles in accounting for estimates, accruals and reserves; –experiencing preparing, auditing, analyzing or evaluating generally comparable statements; –understanding of internal controls and procedures for financial reporting; AND –an understanding of audit committee functions.
Financial Expert Person can acquire such attributes through: – education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor; –experience actively supervising one of the above or experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or –other relevant experience.
Prohibited Non-Audit Services Bookkeeping/Accounting-related services Financial info system design/implementation Appraisal/Valuation/Fairness opinions Actuarial services Internal audit outsourcing Management/HR functions Broker-dealer/investment advisor/investment banking Legal services/expert services unrelated to audit Any service prohibited by PCAOB
Test for Unlisted Prohibited Non- Audit Services Public company auditor should not: –audit its own work –function as management or an employee of audit client –promote or advocate client’s stock or financial interest.
A “Special Deal” for Tax Services SarBox permits “tax services,” SEC’s proposed regulations limit role to tax preparation and would prohibit: –representation before tax court (IRS?) –formulation of tax strategies (e.g., tax shelters) designed to minimize a company’s tax obligations.
Required Reports from Auditor to Audit Committee All critical accounting policies and practices of the issuer. All alternative accounting treatments within GAAP that were discussed with management, including: –ramifications of using each alternative; –treatment preferred by the auditor
Required Reports from Auditor to Audit Committee Other material -- written communications between auditor and management
SEC Rules on Attorney Conduct Becoming aware of evidence of a material violation by issuer, officer, director, agent or employee; Report evidence to: –Chief legal officer or CEO; –CEO; –Audit committee/independent director’s committee/full board OR –Qualified Legal Compliance Committee
SEC Rules on Attorney Conduct “Material Violation” - violations of securities laws, breaches of fiduciary duties, or similar material violations about which reasonable investors would want to know If no “appropriate response,” then noisy withdrawal
SEC Rules on Attorney Conduct “Appropriate Response” -- provides basis for attorney to believe: –No violation has occurred, is occurring or will occur; –issuer adopted appropriate remedial measures, including disclosures and/or sanctions expected to stop ongoing and future violations and rectify past ones.
QUESTIONS TO ASK BEFOREHAND 1.Do I qualify? 2.What are the risks? 3.Is this a full-time job?
Do I Qualify? Independence — affiliations — compensation Financial expertise — education — experience Other audit committee commitments
What are the risks? No change in fiduciary duties or standards of liability YET über class of directors confirm indemnity and insurance
Is this a full-time job? NO Oversight Delegation Control of the Agenda Follow-up
Areas of Focus Revenue recognition Expense avoidance or deferral Off-balance sheet financing Acquisition accounting Equity transactions E.B.B.S. — Earnings Before Bad Stuff (Pro Forma)
Control the Agenda Ten Questions to Put in Your Pocket and Use Now
Ten Key Questions 1.What issues took most of your time and attention this period? 2.In what financial areas would you describe the company as aggressive? Conservative?
Ten Key Questions 3.Did anyone advocate more aggressive or conservative treatment on these issues? How were they resolved? 4. What are the most significant judgment calls you have made this period? With more resources and time, what would you do differently?
Ten Key Questions 5.If the SEC were reviewing the company's financials, what issues would most likely receive close scrutiny? 6.How do your industry peers handle these issues? 7.Are there any accounting policies that, in the layman's view, distort the earnings cycle or mask business trends?
Ten Key Questions 8. Does the most recent MD&A describe, clearly and accurately, the company’s critical accounting policies and all off- balance sheet items and material commitments?
Ten Key Questions 9.Are there any unresolved matters or pending circumstances whose resolution could be significant to the company?
Ten Key Questions 10.How would you characterize the quality of the company’s internal and accounting controls? Does the company need more or better resources to handle its financial reporting obligations, including internal audit personnel?
Advice from auditors?$ Advice from lawyers?$$ Advice from bankers?$$$ Aggressive questions from you? Priceless