edward f. smith

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Edward F. SmithExecutive Director

KPMG’s Audit Committee InstituteJune 25, 2007

Edward F. SmithExecutive Director

KPMG’s Audit Committee InstituteJune 25, 2007

Audit Committee Audit Committee EffectivenessEffectivenessA U D I T C O M M I T T E E I N S T I T U T E

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Today’s DiscussionToday’s Discussion

Current Environment Current Environment

Anticipated Audit Committee Agenda/PrioritiesAnticipated Audit Committee Agenda/Priorities

Oversight of Critical Accounting Policies, Judgments, EstimatesOversight of Critical Accounting Policies, Judgments, Estimates

Oversight of Risk ManagementOversight of Risk Management

Information Technology GovernanceInformation Technology Governance

Audit Committee Interactions with other Financial Reporting Audit Committee Interactions with other Financial Reporting Process ParticipantsProcess Participants

Other Oversight ProcessesOther Oversight Processes

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Current Environment – What We HearCurrent Environment – What We Hear

Evolving role and time commitment of audit committee Evolving role and time commitment of audit committee membersmembers

A renewed focus on “Tone at the Top” and “Tone in A renewed focus on “Tone at the Top” and “Tone in the Middle”the Middle”

Redefining the roles and relationships of financial Redefining the roles and relationships of financial reporting process participantsreporting process participants

Higher expectation of participantsHigher expectation of participants

Role and reporting of internal audit Role and reporting of internal audit

Reexamining and refining key oversight processesReexamining and refining key oversight processes

Meeting expectations of investors and regulatorsMeeting expectations of investors and regulators

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Setting the Audit Committee Agenda/Priorities

Setting the Audit Committee Agenda/Priorities

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa.

The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.

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Looking back on 2006, how satisfied are you that your audit committee's 2006 agenda appropriately addressed the issues that required the committee's attention and oversight?

Looking back on 2006, how satisfied are you that your audit committee's 2006 agenda appropriately addressed the issues that required the committee's attention and oversight?

71.6%

22.5%

4.9%1.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Audit Committee Members Only Percentage

Very satisfied

Somewhat satisfied

Not satisfied

Not sure

Source: Annual Audit Committee Issues Conference (2007)

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Agenda Setting: Audit Committee Priorities for 2007Agenda Setting: Audit Committee Priorities for 2007

Accounting judgments and estimatesAccounting judgments and estimates

Internal controlsInternal controls

Risk managementRisk management

Information technology governanceInformation technology governance

Legal/regulatory complianceLegal/regulatory compliance

Internal and external auditor effectivenessInternal and external auditor effectiveness

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Audit Committee Oversight of Critical Accounting Policies, Judgments, and Estimates

Audit Committee Oversight of Critical Accounting Policies, Judgments, and Estimates




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Financial Restatement TrendsFinancial Restatement Trends

Restatements by Year FiledRestatements by Year Filed

Sources: Huron Consulting Group, 2004 Annual Review of Financial Reporting Matters (March 25, 2005) and Glass Lewis & Co., February 2007 Restatements Trends Alert.

270 330

545664

1,3581,538

0

500

1000

1500

2000

2001 2002 2003 2004 2005 2006

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19.1%

46.9%

34.0%

0%

10%

20%

30%

40%

50%

60%

70%

Total Percentage

Very satisfied Somewhat satisfied Needs improvement

How satisfied are you that the audit committee spends enough time discussing management’s critical accounting policies, judgments, and estimates?

How satisfied are you that the audit committee spends enough time discussing management’s critical accounting policies, judgments, and estimates?


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Critical Accounting Policies, Judgments and Estimates – Possible Questions to ConsiderCritical Accounting Policies, Judgments and Estimates – Possible Questions to Consider

What are the company’s most critical accounting policies and estimates?What are the company’s most critical accounting policies and estimates?Focus on initial selection as well as changes Focus on initial selection as well as changes

What is the financial impact of each significant management accounting What is the financial impact of each significant management accounting judgment and estimate?judgment and estimate?What was the range of alternatives and the reason for selecting this What was the range of alternatives and the reason for selecting this policy/estimate?policy/estimate?What was the process used to arrive at the accounting judgment/estimate? What was the process used to arrive at the accounting judgment/estimate? Does the process take into consideration all of the factors that might Does the process take into consideration all of the factors that might impact the judgment/estimate?impact the judgment/estimate?What is the external auditor’s judgment about the quality of the accounting What is the external auditor’s judgment about the quality of the accounting principle/estimate?principle/estimate?What is the likelihood of materially different reported results if different What is the likelihood of materially different reported results if different assumptions or conditions were to prevail? assumptions or conditions were to prevail? Is the accounting principle/estimate consistent with GAAP? Does it in any Is the accounting principle/estimate consistent with GAAP? Does it in any way subvert the intent of the guidance? Is it consistent with the company’s way subvert the intent of the guidance? Is it consistent with the company’s business model? Was it made to achieve an earnings outcome?business model? Was it made to achieve an earnings outcome?

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Audit Committee Oversight of Risk Management

Audit Committee Oversight of Risk Management




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Why Risk Management Matters toAudit CommitteesWhy Risk Management Matters toAudit Committees

NYSE Listing Standards RequirementsNYSE Listing Standards Requirements

The Audit Committee must “discuss policies with respect to risk The Audit Committee must “discuss policies with respect to risk management and risk assessment.” management and risk assessment.”

NYSE Commentary – “The audit committee is not required to be theNYSE Commentary – “The audit committee is not required to be thesole body responsible for risk… management, but…the committeesole body responsible for risk… management, but…the committeemust discuss guidelines and policies to govern the process by whichmust discuss guidelines and policies to govern the process by whichrisk assessment and management is undertaken.”risk assessment and management is undertaken.”

Evaluation of Adequacy of Internal ControlsEvaluation of Adequacy of Internal Controls

S-O 302 certificationsS-O 302 certifications

S-O 404 assertions and opinions S-O 404 assertions and opinions

Critical Accounting Judgments and Estimates Critical Accounting Judgments and Estimates

How risks affect the estimation processHow risks affect the estimation process

““Risk Factors” in the Company’s 33 and 34 Act FilingsRisk Factors” in the Company’s 33 and 34 Act Filings

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Audit Committee vs. Board (Committee):Who Oversees What Risks?Audit Committee vs. Board (Committee):Who Oversees What Risks?

All Other RisksAll Other Risks

Board/Board Committee Oversight Responsibility Board/Board Committee Oversight Responsibility Until Risk Poses Financial Reporting ImplicationsUntil Risk Poses Financial Reporting Implications

Financial Reporting Financial Reporting RisksRisks

Audit Committee Oversight Responsibility

RiskRiskRiskRisk

RiskRisk

RiskRisk

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11.5%

36.0%

15.8%

6.3%

30.4%

0%

10%

20%

30%

40%

50%

60%

70%

Total Percentage

Financial reporting risks

Financial reporting and legal/regulatory compliance risks

Financial reporting, legal/regulatory compliance, and operational risks

Financial reporting, legal/regulatory compliance, operational, and strategic risks

All major risks

For what categories of risk should your audit committee have primary oversight responsibility?For what categories of risk should your audit committee have primary oversight responsibility?

Percentages may not add to 100% due to rounding.

Source: ACI’s Spring 2006 Audit Committee Roundtables

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Oversight of Risk Management – Key Elements to ConsiderOversight of Risk Management – Key Elements to Consider

How deeply should audit committee probe?How deeply should audit committee probe?

Adequacy of management’s reports to theAdequacy of management’s reports to theaudit committeeaudit committee

Who does the reporting?Who does the reporting?

Commitment of senior managementCommitment of senior management

Support from auditorsSupport from auditors

Communication/Coordination with Other Board Communication/Coordination with Other Board CommitteesCommittees

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Audit Committee Oversight of IT Governance

Audit Committee Oversight of IT Governance




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IT Governance: a Critical ImperativeIT Governance: a Critical Imperative

Information and IT are…Information and IT are…

Vital to the Financial Reporting ProcessVital to the Financial Reporting Process

Integral to ComplianceIntegral to Compliance

Essential to the BusinessEssential to the Business

Increasingly ComplexIncreasingly Complex

Becoming Even More Important…but May Lack Focus and Becoming Even More Important…but May Lack Focus and Attention at the Board LevelAttention at the Board Level

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How satisfied are you with your audit committee’s oversight of the company’s financial reporting-related IT risks?How satisfied are you with your audit committee’s oversight of the company’s financial reporting-related IT risks?

7.4%

42.1%

49.5%

1.1%0%

10%

20%

30%

40%

50%

60%

70%

80%


Very satisfied

Somewhat satisfied

Needs improvement

Not sure


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IT Governance Oversight ChallengesIT Governance Oversight Challenges

““IT” is often a “foreign language,” lacking business IT” is often a “foreign language,” lacking business contextcontext

Fragmented IT governance (people, responsibilities, Fragmented IT governance (people, responsibilities, policies)policies)

Tone at the TopTone at the Top

Alignment of board oversight responsibilitiesAlignment of board oversight responsibilities

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Audit Committee Interactions with Other Financial Reporting

Process Participants

Audit Committee Interactions with Other Financial Reporting

Process Participants




21 ©2006 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

Audit CommitteeAudit Committee

Internal Audit Internal Audit ManagementManagement

External AuditorExternal Auditor

Provide Oversight, Challenge Provide Oversight, Challenge & Influence& Influence

““Tone at the Top”Tone at the Top”Risk and control environmentRisk and control environmentReporting processReporting process

Estimates Estimates Unusual transactionsUnusual transactions

Direct responsibility for Direct responsibility for external auditorexternal auditorManagement and Management and internal auditinternal auditEvaluate processEvaluate processEncourage continual Encourage continual improvementimprovement

Reporting & RisksReporting & Risks

DesignDesign

ImplementImplement

Test and maintainTest and maintain

CommunicateCommunicate

302 Certification302 Certification

EvaluateEvaluate

Test financial reportingTest financial reporting

Internal control Internal control

Risk management processRisk management process

Improvement suggestionsImprovement suggestions

Audit of financial statements and Audit of financial statements and internal control over financial internal control over financial reporting in accordance with reporting in accordance with PCAOB auditing standardsPCAOB auditing standards

Render opinionRender opinion

Integrated audit for Public Co.Integrated audit for Public Co.

SAS 61 communicationsSAS 61 communications

Test and challenge elements ofTest and challenge elements of

Financial reporting processFinancial reporting process

Risk and control Risk and control environmentenvironment

Improvement suggestionsImprovement suggestions

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How satisfied are you with the interaction and the support the Audit Committee receives from the CFO? How satisfied are you with the interaction and the support the Audit Committee receives from the CFO?

13%

1%

86%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total All Responding Participants Percentage

Very satisfied

Somewhat satisfied

Not satisfied

Percentages may not add to 100% due to rounding

Source: 2nd Annual ACI/NACD Public Company Audit Committee Member Survey (2006-2007)

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How satisfied are you that your audit committee’s evaluation process enhances your audit firm’s effectiveness?How satisfied are you that your audit committee’s evaluation process enhances your audit firm’s effectiveness?

24.2%

51.6%

18.9%

5.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%


Very satisfied

Somewhat satisfied

Needs improvement

Not sure


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Oversight of Internal AuditOversight of Internal Audit

How has the role of, and resources needed by, internal How has the role of, and resources needed by, internal audit changed?audit changed?

What relationship should exist between the audit What relationship should exist between the audit committee and internal audit?committee and internal audit?

How do you help ensure that internal audit will bring How do you help ensure that internal audit will bring controversial issues to the attention of the audit controversial issues to the attention of the audit committee?committee?

How does the audit committee evaluate Internal Audit?How does the audit committee evaluate Internal Audit?

What does the Audit Committee value most about What does the Audit Committee value most about Internal Audit?Internal Audit?

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32.0%

47.0%

8.0%6.0% 7.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Total All Participants

Who provides primary support to the audit committee in establishing its meeting agenda and in carrying out its oversight activities ?Who provides primary support to the audit committee in establishing its meeting agenda and in carrying out its oversight activities ?

CFO

Internal Auditor

General Counsel/Secretary

External AuditorOther Source: Audit Committee Institute

Quick Poll, December 2006

Percentages may not add to 100% due to rounding.

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How satisfied are you that your company’s Internal Audit function has adequate resources (budget and people with the training, skills, education, and knowledge of the company) to carry out its responsibilities?

How satisfied are you that your company’s Internal Audit function has adequate resources (budget and people with the training, skills, education, and knowledge of the company) to carry out its responsibilities?

27.8%

46.4%

21.6%

4.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%


Very satisfied

Somewhat satisfied

Needs improvement

We do not have an internal audit function

Source: The 3rd Annual Audit Committee Issues Conference


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How confident are you that your company’s Chief Audit Executive would report any controversial issues involving senior management to the Audit Committee?

How confident are you that your company’s Chief Audit Executive would report any controversial issues involving senior management to the Audit Committee?

76%

22%

2%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Among Those With An Internal Audit Function

Very confident

Somewhat confident

Not confident



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Other Oversight ProcessesOther Oversight Processes

Agenda SettingAgenda Setting

Audit Committee MeetingsAudit Committee Meetings

Continuous ImprovementContinuous Improvement

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How concerned are you that “compliance activities” detract from substantial discussion concerning company issues, resulting in a negative impact on the overall effectiveness of the Audit Committee?

How concerned are you that “compliance activities” detract from substantial discussion concerning company issues, resulting in a negative impact on the overall effectiveness of the Audit Committee?

15%

57%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total All Responding Participants Percentage

Very concerned

Somewhat concerned

Not concerned



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Audit Committee Meetings Audit Committee Meetings

Which of the following would most improve the Which of the following would most improve the effectiveness and efficiency of your audit committee effectiveness and efficiency of your audit committee meetings? meetings?

1. 1. More time spent discussing issues versus listening to presentationsMore time spent discussing issues versus listening to presentations

2. Better prioritization of issues2. Better prioritization of issues

3. Higher quality/more timely pre-meeting materials 3. Higher quality/more timely pre-meeting materials

4. More effective use of executive sessions4. More effective use of executive sessions

SourceSource: Annual Audit Committee Issues Conference (2007): Annual Audit Committee Issues Conference (2007)

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How important is audit committee member education (outside of formal audit committee meetings) to the overall effectiveness and efficiency of your audit committee?

How important is audit committee member education (outside of formal audit committee meetings) to the overall effectiveness and efficiency of your audit committee?

65.7%

31.4%

1.9% 1.0%0%

10%

20%

30%

40%

50%

60%

70%

80%


Very important

Somewhat important

Not important

Not sure

Source: The 3rd Annual Audit Committee Issues Conference

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How satisfied are you that your Audit Committee’s current self-evaluation approach enhances its effectiveness?How satisfied are you that your Audit Committee’s current self-evaluation approach enhances its effectiveness?

37%

54%

8%

0%

10%

20%

30%

40%

50%

60%

Among Those With A Self-Evaluation Process

Very satisfied

Somewhat satisfied

Not satisfied

Source: ACI/NACD 2006 Survey.

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Key Oversight Processes: Audit Committee EffectivenessKey Oversight Processes: Audit Committee Effectiveness

Setting the audit committee agenda / issue prioritizationSetting the audit committee agenda / issue prioritization

Making the most of audit committee meetingsMaking the most of audit committee meetings

Setting clear expectations for each participant in the financial Setting clear expectations for each participant in the financial reporting process, including the auditorsreporting process, including the auditors

Supporting the CFO, and the internal and external auditorsSupporting the CFO, and the internal and external auditors

Coordinating and communicating with the full Board and other Coordinating and communicating with the full Board and other Board committeesBoard committees

Ensuring continuous improvement (education and self-Ensuring continuous improvement (education and self-assessments)assessments)

edward f. smith

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