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The Audit Committee. Purpose, Process, Professionalism. A New World of Corporate Governance. Boards of directors and committees must be: Proactive Informed Investigative Accountable. Clarifying Governance.

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Presentation Transcript
The audit committee

The Audit Committee

Purpose, Process, Professionalism


A new world of corporate governance
A New World of Corporate Governance

Boards of directors and committees must be:

  • Proactive

  • Informed

  • Investigative

  • Accountable


Clarifying governance
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.


The iia corporate governance model

Board

Effective

Governance

External Audit

Internal Audit

Management

The IIA Corporate Governance Model


The bad news
The Bad News

  • Stakes are greater

  • No “figure head” board members allowed

  • Public trust has diminished

  • Greater challenges

  • More director liability


Clarifying liability
Clarifying Liability

Directors need to be realistic about their personal liability under state and federal law, neither exaggerating nor ignoring their exposure.


Fiduciary duties
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


Fiduciary duties cont
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


Director evaluations and qualifications
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


What is the ac s role in governance
What is the AC’s Role in Governance?

  • Oversight of financial reporting

  • Risk management

  • Internal control

  • Compliance

  • Ethics

  • Management

  • Internal auditors

  • External auditors


Committee meetings
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


Tone at the top
Tone at the Top

Management, the board, and the audit committee all play critical roles in an organization’s tone at the top.


Best practices in code of conduct oversight
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.


Best practices in compliance and ethics oversight
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.


Noses in fingers out
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.


Communications checklist
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.


Communications checklist continued
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.


Key issues of concern
Key Issues of Concern

  • Financial Accuracy

  • Risk Management

  • Control Assessment

  • External Auditor Oversight

  • Effective Use of Internal Auditing


Statistics on first full year of filings as of march 30 2006 404 opinions
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


Gaap accounting areas of failure for adverse opinions
GAAP/Accounting Areas of Failure for Adverse Opinions 2006

  • Tax-related issues – 32%

  • Revenue recognition – (31.3%)

  • Inventory – (27.4%)

    Source: Section 404 Internal Control Material

    Weakness Dashboard Audit Analytics


Internal controls over financial reporting issues adverse opinions
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


Clarifying the value of internal auditing
Clarifying the Value of Internal Auditing Adverse Opinions

Audit committees must understand internal auditing’s role if they are to work effectively and share a healthy interdependence.


Understanding internal audit
Understanding Internal Audit Adverse Opinions

  • Objectivity

  • Reporting structure

  • Risk management

  • Staffing

  • Prioritization

  • Adding Value


Asking the right questions
Asking the Right Questions Adverse Opinions

Audit committee members must maintain an in-depth understanding of internal audit best practices and how internal audit is functioning.


Consider
Consider… Adverse Opinions

How does the audit committee live up to its significant governance responsibilities and meet the high expectations of shareholders and other outside parties?


Charting the course
Charting the Course Adverse Opinions

An audit committee charter is a blueprint for its operation and should address:

  • Processes

  • Procedures

  • Responsibilities


For more information on audit committees and governance
For More Information on Audit Committees and Governance Adverse Opinions

  • IIA website www.theiia.org/go?to=auditcommittee

  • 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