www.theiia.org the audit committee purpose, process, professionalism
TRANSCRIPT
www.theiia.org
The Audit Committee
Purpose, Process, Professionalism
www.theiia.org
A New World of Corporate Governance
Boards of directors and committees must be:
– Proactive– Informed– Investigative– Accountable
www.theiia.org
Clarifying Governance
Governance is the system by which organizations are directed and controlled. It includes the rules and procedures for making decisions on corporate affairs to ensure success while maintaining the right balance with the stakeholders’ interest.
www.theiia.org
The IIA Corporate Governance Model
EffectiveGovernanc
e
www.theiia.org
The Bad News
• Stakes are greater• No “figure head” board
members allowed• Public trust has diminished• Greater challenges• More director liability
www.theiia.org
Clarifying Liability
Directors need to be realistic about their personal liability under state and federal law, neither exaggerating nor ignoring their exposure.
www.theiia.org
Fiduciary Duties
The duties of care and loyalty, and the expectation that directors will act in good faith.
These are the primary source of director liability under state law.
Source: Director Liability: Myths, Realities And Prevention – National Association of Corporate Directors
www.theiia.org
Fiduciary Duties (cont.)
Board members who wish to become empowered guardians and builders of corporate value must:
– Learn and follow best practices,– avoid conflicts of interest,– pay strict attention to board matters,– drawing on appropriate expertise,
including their own.
Source: Director Liability: Myths, Realities And Prevention – National Association of Corporate Directors
www.theiia.org
Director Evaluations and Qualifications
• 38% of companies performed director evaluations in 2005 and 45% are planning to do so in 2006
• 97% of companies have established director qualifications up from 87% in 2005
Harvard Business School
www.theiia.org
What is the AC’s Role in Governance?
• Oversight of financial reporting• Risk management• Internal control• Compliance• Ethics• Management• Internal auditors• External auditors
www.theiia.org
Committee Meetings
• 52% of companies report a significant increase in the number or length of meetings of the Audit Committee in the past two years.
Harvard Business School
www.theiia.org
Tone at the Top
Management, the board, and the audit committee all play critical roles in an organization’s tone at the top.
www.theiia.org
Best Practices in Code-of-Conduct Oversight:
Ensure:
– A code of conduct has been developed, reviewed and updated as needed.
– All employees receive the code of conduct, understand it, and receive training.
– Management exhibits ethical behavior and reported violations receive action.
www.theiia.org
Best Practices in Compliance and Ethics Oversight:
Ensure:– Compliance with laws and regulations
– Financial reporting of significant issues
– Management monitoring of program effectiveness
– Staying informed and recognizing trends to ensure appropriate action
– Internal audit includes assessment of compliance and ethics risks in their audit plan
– AC meetings with program manager to discuss key risks, status, issues, investigations, disciplinary action and effectiveness.
www.theiia.org
Noses In. Fingers Out.
•The lines of authority for audit committees and management should be clear and understood.
•AC members must communicate openly with management. They must also challenge management as appropriate.
www.theiia.org
Communications Checklist
• Management is easily accessible.• Management reaches out to the
audit committee regularly.• Management answers audit
committee questions fully and completely.
• Management provides factual information to support responses.
www.theiia.org
Communications Checklist (continued)
• Management admits not knowing an answer.
• Management supports the audit committee by contacting additional resources and specialists.
• Management advises the audit committee of significant issues in a timely manner.
• Management seeks audit committee input in advance of key decisions.
www.theiia.org
Key Issues of Concern
• Financial Accuracy• Risk Management• Control Assessment• External Auditor Oversight• Effective Use of Internal
Auditing
www.theiia.org
Statistics on First Full Year of Filings As of March 30, 2006
- 404 Opinions
• 3710 filers• 591 (15.9%) received adverse opinions
from their public accountants• 90 (2.4%) of all filers restated their first
year’s Section 404 opinion; 59 (10%) of filers with adverse opinions restated their first year’s Section 404 opinion
Source: Section 404 Internal Control Material Weakness Dashboard Audit
Analytics
www.theiia.org
GAAP/Accounting Areas of Failure for Adverse Opinions
• Tax-related issues – 32%• Revenue recognition – (31.3%)• Inventory – (27.4%)
Source: Section 404 Internal Control Material Weakness Dashboard Audit
Analytics
www.theiia.org
Internal Controls Over Financial Reporting Issues – Adverse
Opinions
• Material year-end adjustments (53.1%)
• Personnel issues (48.1%)• Restatements of financials (49.6%)
Source: Section 404 Internal Control Material Weakness Dashboard Audit Analytics
www.theiia.org
Clarifying the Value of Internal Auditing
Audit committees must understand internal auditing’s role if they are to work effectively and share a healthy interdependence.
www.theiia.org
Understanding Internal Audit
• Objectivity• Reporting structure• Risk management• Staffing• Prioritization• Adding Value
www.theiia.org
Asking the Right Questions
Audit committee members must maintain an in-depth understanding of internal audit best practices and how internal audit is functioning.
www.theiia.org
Consider…
How does the audit committee live up to its significant governance responsibilities and meet the high expectations of shareholders and other outside parties?
www.theiia.org
Charting the Course
An audit committee charter is a blueprint for its operation and should address:
– Processes– Procedures– Responsibilities
www.theiia.org
For More Information on Audit Committees and
Governance• IIA website www.theiia.org/go?to=audit committee
• Research/Publications– Audit Committee Effectiveness: What Works Best– Tone at The Top (corporate governance newsletter)– The Professional Practices Framework– The IIA Bookstore
• Guidance – Audit Committee: Purpose, Process, Professionalism – Audit Committee: Discussions on Performance (self-assessment)– 20 Questions Directors Should Ask About Internal Audit